Q1: Why is the second option – a decrease in the account balance - marked as the correct answer for Poll Question 16?

A: You are right. The first option – an increase in the account balance – is the correct response for Poll Question 16. It might have appeared that a decrease in the account balance was marked as correct when the results of the poll were broadcast, because 100% of the participants chose the incorrect answer. The $7,500 credit entry to accumulated depreciation, a contra-asset account, is an increase in the account balance. A contra-asset account is essentially a liability account, and so a credit entry increases the balance.

Increasing that accumulated depreciation account balance decreases the book value of fixed assets on the balance sheet. The depreciation expense adds to the accumulated depreciation balance and that increase in accumulated depreciation, a contra-asset account, reduces the net book value of fixed assets.

The way the accounting world works is that we don’t write down the fixed asset directly, but we write down the book value through the use of this accumulated depreciation account. We increase that account; and, therefore, because more accumulated depreciation is measured against the original historic cost of fixed assets, the book value of fixed assets falls.

When fixed assets are purchased, they are recorded at historic cost, which we will review in the next session; and then as those assets are used up, the accumulated depreciation increases, and the net book value of the fixed assets decreases.

Course overview: Double Entry Accounting, the Accounting Equation, and Debits and Credits