What happens to Net Income and Owner's Equity when Depreciation increases by $10?

When depreciation increases by $10, it directly affects the net income, as depreciation is an expense on the income statement. Since expenses reduce net income, an increase in depreciation leads to a decrease in net income by the same amount—$10. This reduction in net income subsequently impacts owner's equity.

Owner's equity is derived from net income, which ultimately affects retained earnings, a component of owner's equity. Therefore, if net income decreases by $10, owner's equity will also decrease by the same amount, reflecting a $10 drop.

The assessment that net income decreases by $6, while owner’s equity decreases by $10 is inaccurate because both figures typically change by the same amount due to the direct relationship between net income and retained earnings. Thus, the connection between an increase in depreciation and its effect on net income and owner's equity demonstrates a clear understanding of these financial concepts.