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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

In the final accounts of a sole proprietor, depreciation charged for the year on machinery is shown in which manner?

Depreciation is debited to the Profit and Loss Account as an expense, because it represents the cost of using the asset during the year. The same amount reduces the asset's book value in the Balance Sheet. It is not income and is not deducted directly from capital.

  1. ADebited to the Profit and Loss Account as an expenseCorrect
  2. BCredited to the Profit and Loss Account as an income
  3. CAdded to the Trading Account as a direct cost only
  4. DDeducted from the capital in the Balance Sheet

Explanation

Depreciation is a non-cash expense of using the asset during the year. It is debited to the Profit and Loss Account and reduces the asset's book value in the Balance Sheet. Crediting it as income would wrongly increase profit.

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