Why is accumulated depreciation a credit balance?

The asset cost minus accumulated depreciation is known as the book value (or “net book value”) of the asset. For example, at December 31, 20X2, the net book value of the truck is $50,000, consisting of $150,000 cost less $100,000 of accumulated depreciation. By the end of the asset’s life, its cost has been fully access denied depreciated and its net book value has been reduced to zero. Customarily the asset could then be removed from the accounts, presuming it is then fully used up and retired. In this case we added a debit of $4,665

to the income statement column. This means we must add a credit of

$4,665 to the balance sheet column.

Under both IFRS and US GAAP, companies can report more than the

minimum requirements. The statement of retained earnings always leads with beginning

retained earnings. Beginning retained earnings carry over from the

previous period’s ending retained earnings balance. Since this is

the first month of business for Printing Plus, there is no

beginning retained earnings balance. Notice the net income of

$4,665 from the income statement is carried over to the statement

of retained earnings. Dividends are taken away from the sum of

beginning retained earnings and net income to get the ending

retained earnings balance of $4,565 for January.

Prepaid Expenses

This ending

retained earnings balance is transferred to the balance sheet. Using the table

provided, for each entry write down the income statement account

and balance sheet account used in the adjusting entry in the

appropriate column. Depreciation may also require an adjustment at the end of the

period.

The next step is to record information in the adjusted trial

balance columns. When one of these statements is inaccurate,

the financial implications are great. Did we continue to follow the rules of adjusting entries in

these two examples? In this case, Unearned Fee Revenue increases (credit) and Cash

increases (debit) for $48,000. There are a few other guidelines that support the need for

adjusting entries.

Case 2: Reducing Balance Method of Computing Depreciation

Looking at the asset section of the balance sheet, Accumulated Depreciation–Equipment is included as a contra asset account to equipment. The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425). The accounting equation is balanced, as shown on the balance sheet, because total assets equal $29,965 as do the total liabilities and stockholders’ equity.

It will be represented as a current asset on the right side of the balance sheet. If the values of the adjusted purchases are provided, then the trial balance will show both the accounts for adjusted purchases and the closing stock. The accumulated depreciation is shown as a “credit item” in the trial balance. Accumulated depreciation is nothing but the sum total of depreciation charged until a specified date.

Accumulated Depreciation on Long-Term Assets

AccountEdge Pro’s on-site application charges a one-time fee of $399, while the cloud application, Priority Zoom, starts at $50/month for up to 5 users, with additional licenses $50/month. About the Author – Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers. You can also accelerate depreciation legally, getting more of a tax benefit in the first year you own the property and put it into service (begin using it). For example, if you use your car 60% of the time for business and 40% for personal, you can only depreciate 60%. If you use an asset, like a car, for both business and personal travel, you can’t depreciate the entire value of the car, but only the percentage of use that’s for business.

Time brings about change, and an adjusting process is needed to cause the accounts to appropriately reflect those changes. These adjustments typically occur at the end of each accounting period, and are akin to temporarily cutting off the flow through the business pipeline to take a measurement of what is in the pipeline. In this case, the asset cost and accumulated depreciation values are expressly debited and credited in the trial balance as indicated. Sometimes, authors in accountancy may even indicate the abbreviations-COST against the fixed asset item in the trial balance. Remember that, in this approach, the fixed asset is always recorded at cost.

How Inventory Adjustments Affect Income Statements

When a company purchases supplies, it may not use all supplies

immediately, but chances are the company has used some of the

supplies by the end of the period. It is not worth it to record

every time someone uses a pencil or piece of paper during the

period, so at the end of the period, this account needs to be

updated for the value of what has been used. Before posting any closing entries, you want to make sure that your trial balance reflects the most accurate information possible.

Interest can be earned from bank account holdings, notes

receivable, and some accounts receivables (depending on the

contract). Interest had been accumulating during the period and

needs to be adjusted to reflect interest earned at the end of the

period. Note that this interest has not been paid at the end of the

period, only earned. This aligns with the revenue recognition

principle to recognize revenue when earned, even if cash has yet to

be collected.

Over time, accumulated depreciation accounts increase until it nears the original cost of the asset, at which point, the depreciation expense account is closed out. Depreciation is usually seen as a cost, even though unlike other expenses, it is not a direct cash outflow. A company can create a net cash outflow for the full value of the asset when the assets are purchased.

• This account is paired with the fixed assets line item on the balance sheet, so that the combined total of the two accounts reveals the remaining book value of the fixed assets.
• Some assets are short-term, used up within a year (like office supplies).
• This creates a liability

  that the company must pay at a future date.

• Supplies increases (debit) for $400, and Cash decreases (credit)

  for $400.