Page 126 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

account and crediting the amount to an accumulated depreciation account. MicroTrain’s depreciation on its
delivery trucks for December is USD 750. The company records the depreciation as follows:
2010
Dec. 31 Depreciation Expense – Trucks 750
Accumulated Depreciation - Trucks 750 Adjusted 4-
Depreciation
To record depreciation expense for December.
After posting the adjusting entry, the T-accounts appear as follows:

(Dr.) Depreciation Expense—Trucks (Cr)
Increased by 2010
$750 Dec 31 Adjustment 4 750

(Dr.) Accumulated Depreciation—Trucks (Cr.) Increased by $750
(book value of asset
decreased)
2010
Dec. 31 Adjustment 4 750
MicroTrain reports depreciation expense in its income statement. And it reports accumulated depreciation in
the balance sheet as a deduction from the related asset.
The accumulated depreciation account is a contra asset account that shows the total of all depreciation

recorded on the asset from the date of acquisition up through the balance sheet date. A contra asset account is a
deduction from the asset to which it relates in the balance sheet. The purpose of a contra asset account is to reduce
the original cost of the asset down to its remaining undepreciated cost or book value. The accumulated
depreciation account does not represent cash that is being set aside to replace the worn out asset. The
undepreciated cost of the asset is the debit balance in the asset account (original cost) minus the credit balance in
the accumulated depreciation contra account. Accountants also refer to an asset’s cost less accumulated
depreciation as the book value (or net book value) of the asset. Thus, book value is the cost not yet allocated to an
expense. In the previous example, the book value of the equipment after the first month is:
Cost USD 40,000
Less: Accumulated depreciation 750
Book value (or cost not yet allocated to as an expense) 39,250
MicroTrain credits the depreciation amount to an accumulated depreciation account, which is a contra asset,
rather than directly to the asset account. Companies use contra accounts when they want to show statement readers
the original amount of the account to which the contra account relates. For instance, for the asset Trucks, it is useful
to know both the original cost of the asset and the total accumulated depreciation amount recorded on the asset.
Therefore, the asset account shows the original cost. The contra account, Accumulated Depreciation—Trucks,

shows the total amount of recorded depreciation from the date of acquisition. By having both original cost and the
accumulated depreciation amounts, a user can estimate the approximate percentage of the benefits embodied in the
asset that the company has consumed. For instance, assume the accumulated depreciation amount is about three-
fourths the cost of the asset. Then, the benefits would be approximately three-fourths consumed, and the company
may have to replace the asset soon.
Thus, to provide more complete balance sheet information to users of financial statements, companies show
both the original acquisition cost and accumulated depreciation. In the preceding example for adjustment 4, the
balance sheet at 2010 December 31, would show the asset and contra asset as follows:

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