What does depreciation typically affect in accounting?

Depreciation primarily affects asset valuation in accounting. When a company purchases a fixed asset, such as machinery or equipment, the asset is recorded on the balance sheet at its original cost. However, over time, the value of that asset typically decreases due to wear and tear, obsolescence, or other factors. Depreciation provides a systematic way to allocate the cost of the asset over its useful life, which helps present a more accurate representation of the asset's current value on the balance sheet.

By recording depreciation, businesses can reflect the true net worth of their assets, allowing for more accurate financial reporting and analysis. This also impacts the company's equity, as the accumulated depreciation reduces the book value of the asset. Understanding how depreciation influences asset valuation is crucial for stakeholders assessing the financial health and performance of an organization.

While depreciation does have implications for income statements (affecting net income), cash flow (as it represents a non-cash expense), and liabilities in a broader sense, its direct impact is most significant when it comes to valuing assets on the balance sheet.