If the usual adjusting entry for depreciation on equipment is omitted at year-end, which statement is true?

• A. Net income will be overstated for the year
• B. Net income will be understated for the year
• C. Expenses will be overstated
• D. Assets will be understated

Answer: (A)

Depreciation spreads the cost of a equipment asset over its useful life by recording depreciation expense and increasing the contra-asset accumulated depreciation. If you omit this adjusting entry, the expense is not recognized, so expenses stay too low and net income ends up higher than it should be. At the same time, the asset’s book value would stay higher because accumulated depreciation isn’t updated, so assets are actually overstated. The statement that matches the income effect is that net income will be overstated for the year.