Accounting for Deferrals
The use of assets results in expense recognition and this is an asset use transaction:
Illustration 3-8: Effect of depreciation expense recognition
|
Assets |
... |
Equity |
|
Car - Accumulated Depreciation |
... |
Retained Earnings - Deprec. Expense |
Beginning Balances |
$0 |
|
$1,200 |
| 7) Depreciation Expense |
(700) |
|
(700) |
Ending Balances |
(700) |
|
500 |
It is important to note that the Car account was not directly affected by this transaction. Instead, a special contra asset Accumulated Depreciation account was used. Using the accumulated depreciation account allows keeping track of the original car cost recorded in the Car account.
Accumulated depreciation represents an estimated cost of an asset used in operations. Accumulated depreciation is a cumulative of all depreciation expenses recognized for a particular asset. Accumulated depreciation is an example of a contra asset account. This account is included in the balance sheet under related asset accounts.
Contra asset account is one that is offset against an asset account on the balance sheet. Contra asset accounts have credit balances and thus, reduce asset account balances.
Book value, also referred to as carrying value, is the result of asset and related contra asset accounts offset. In other words, book value is the difference between an asset account (i.e., cost) and corresponding contra asset account (i.e., accumulated depreciation).
In SuperDels' case, the book value of the car will be $3,300. The book value is calculated as the difference between the original cost of $4,000 and accumulated depreciation of $700.
3.1.8 Financial statements for SuperDels for 20X7
The financial statements for SuperDels for 20X7 are presented below.
Illustration 3-9: SuperDels financial statements for 20X7
SuperDels Income Statement For the Period Ended 20X7 |
|
|
|
Services Revenue |
$1,500 |
Operating Expenses |
(300) |
Depreciation Expense |
(700) |
|
|
Net Income |
500 |
SuperDels Statement of Changes in Equity Period Ended 20X7 |
|
|
|
Beginning Contributed Capital |
$0 |
Plus: Capital Acquisition |
4,400 |
Ending Contributed Capital |
4,400 |
|
|
Beginning Retained Earnings |
$0 |
Plus: Net Income |
500 |
Ending Retained Earnings |
500 |
|
|
Total Equity |
$ 4,900 |
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