What is the effect on the balance sheet and income statement when a long-term asset is purchased, and how does this change over time?

• A. At purchase, non-current assets decrease and cash increase; depreciation is expensed immediately.
• B. At purchase, non-current assets increase and cash decrease; no immediate expense. Over time, depreciation reduces net income and decreases asset book value.
• C. At purchase, current assets increase and liabilities increase; no expense recognized.
• D. At purchase, expenses are recognized immediately; asset value unaffected in future periods.

Answer: (B)

When a long-term asset is purchased, you capitalize it: the asset is recorded on the balance sheet and cash is reduced by the same amount. There is no expense on the income statement at the moment of purchase because you’re spreading the cost over the asset’s useful life through depreciation. Over time, depreciation expense is recognized each period, which lowers net income on the income statement. It also increases accumulated depreciation on the balance sheet, which reduces the asset’s net book value (carrying amount) over time. In short, the purchase boosts non-current assets and reduces cash initially, then depreciation gradually lowers both net income and the asset’s book value as time passes.