Which statement correctly describes depreciation in the financial statements of a sole trader?
Correct answer: C. It is an expense in the income statement and reduces the asset value
- A. It is a cash payment shown only in the cash book
- B. It is a liability that increases the owner's capital
- C. It is an expense in the income statement and reduces the asset value
- D. It is income recorded when a fixed asset is used
Explanation
Depreciation allocates the cost of a non-current asset over its useful life. It is charged as an expense and reduces the asset's carrying amount, although no current cash payment is made.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
Practise Financial Statements of Sole Traders
34 free Financial Statements of Sole Traders MCQs from Accounting, each with the correct answer and an explanation. Unlimited attempts, no account needed.
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