How does depreciation impact the income statement?

Depreciation impacts the income statement by being recorded as an expense. When a company applies depreciation, it systematically allocates the cost of a tangible asset over its useful life, reflecting the wear and tear of the asset. This allocation is recognized as an expense on the income statement, which ultimately decreases the company's earnings before tax and, consequently, net income.

Since expenses reduce net income, the recording of depreciation leads to an increase in total expenses, thus lowering net income. This is essential for accurately reflecting the company’s performance and financial position, as it matches the cost of using the asset with the revenue generated from it, following the matching principle in accounting.

In contrast, other options presented do not correctly characterize the effect of depreciation on the income statement: it does not increase net income, it cannot be categorized as an asset on its own, and it certainly does have an effect on the income statement.