What occurs to total assets on the balance sheet when net income decreases by $6 due to increased depreciation?

• A. Total assets increase by $4
• B. Total assets decrease by $6
• C. Total assets remain the same
• D. Total assets decrease by $4

Answer: (B)

When net income decreases by $6 due to increased depreciation, the impact on total assets can be understood through the accounting equation and the implications of depreciation expenses.

Depreciation is a non-cash expense that reduces net income. However, it also affects the value of fixed assets on the balance sheet. When an asset is depreciated, its carrying value is reduced, reflecting the decrease in value over time due to wear and tear or obsolescence.

In this scenario, the increase in depreciation directly decreases net income by $6, which in turn reduces retained earnings (part of equity) by the same amount on the balance sheet. Since depreciation increases the accumulated depreciation contra asset account, it results in a direct reduction of total assets by $6. This occurs because total assets are calculated by taking the value of all assets, including the reduction from accumulated depreciation. Therefore, the overall effect is a $6 decrease in total assets due to the increased depreciation reflecting in both the income statement and the balance sheet.

This connection demonstrates that a decline in net income due to depreciation translates to a reduction in the total assets on the balance sheet by the same amount.