What is the main effect of recording depreciation on financial statements?

Recording depreciation has a significant impact on financial statements, particularly in how it affects reported net income. When depreciation is recorded, it is recognized as an expense on the income statement, which reduces the net income for the period. This reduction in net income reflects the consumption of an asset’s economic benefits over time and allows businesses to match expenses with the revenue they help generate, adhering to the matching principle of accounting.

By lowering the reported net income, depreciation also affects retained earnings on the balance sheet, as these earnings are derived from net income. This is crucial for stakeholders who analyze a company's profitability and financial health.

The other options relate to different aspects of financial reporting but do not accurately describe the main effect of depreciation recording. For example, depreciation does not directly increase total equity; rather, it impacts net income and subsequently retained earnings. It does not increase cash flows from operations, although it is a non-cash expense that can provide tax benefits. Lastly, it does not directly reduce total liabilities; the recording of depreciation is unrelated to the company’s obligations or debt. Therefore, the most accurate reflection of the effect of recording depreciation on financial statements is the reduction in net income reported.