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expense if the entry was made correctly and if the expenditure had been improperly charged (debited) to the asset
account in Exhibit 89.
After Expenditure Entry
2010 Jan 1 Correct Incorrect
Cost $15,000 $15,000 $19,000T
Accumulated depreciation 9,000 5,000* 9,000
Book value $ 6,000 $10,000 $10,000
Remaining life 2 years 6 years 6 years
Depreciation expense per year $ 3,000 $ 1,667 $1,667
* ($9,000 - $4,000)
T ($15,000 + $4,000)
Exhibit 89: Expenditure extending plant asset life
If an expenditure that should be expensed is capitalized, the effects are more significant. Assume now that USD
6,000 in repairs expense is incurred for a plant asset that originally cost USD 40,000 and had a useful life of four
years and no estimated salvage value. This asset had been depreciated using the straight-line method for one year

and had a book value of USD 30,000 (USD 40,000 cost—USD 10,000 first-year depreciation) at the beginning of
2010. The company capitalized the USD 6,000 that should have been charged to repairs expense in 2010. The
charge for depreciation should have remained at USD 10,000 for each of the next three years. With the incorrect
entry, however, depreciation increases.
Regardless of whether the repair was debited to the asset account or the accumulated depreciation account, the
firm would change the depreciation expense amount to USD 12,000 for each of the next three years [(USD 30,000
book value + USD 6,000 repairs expense)/3 more years of useful life]. These errors would cause net income for the

year 2010 to be overstated USD 4,000: (1) repairs expense is understated by USD 6,000, causing income to be
overstated by USD 6,000; and (2) depreciation expense is overstated by USD 2,000, causing income to be
understated by USD 2,000. In 2011, the overstatement of depreciation by USD 2,000 would cause 2011 income to
be understated by USD 2,000.
Note that the USD 6,000 recording error affects more than just the expense accounts and net income. Plant
asset and Retained Earnings accounts on the balance sheet also reflect the impact of this error. To see the effect of
incorrectly capitalizing the USD 6,000 to the asset account rather than correctly expensing it, look at Exhibit 90.

Subsidiary records used to control plant assets
Most companies maintain formal records (ranging from handwritten documents to computer tapes) to ensure
control over their plant assets. These records include an asset account and a related accumulated depreciation
account in the general ledger for each major class of depreciable plant assets, such as buildings, factory machinery,

office equipment, delivery equipment, and store equipment.
Because the general ledger account has no room for detailed information about each item in a major class of
depreciable plant assets, many companies use plant asset subsidiary ledgers. Subsidiary ledgers for Accounts
Receivable and Accounts Payable were explained briefly in An accounting perspective in Chapter 4. A company
may also use subsidiary ledgers for plant assets. For instance, assume a company has a general ledger account for
office furniture. The subsidiary ledger for office furniture might contain four separate accounts entitled: Desks,
Chairs, File Cabinets and Bookshelves. Alternatively, a company could even have a separate subsidiary account for
each piece of furniture. The total of all the subsidiary account balances must equal the total of the general ledger
"control" account for Office Furniture at the end of the accounting period. Each general ledger account for each

class of depreciable asset, such as Buildings, Delivery Equipment, and so on, could have a subsidiary ledger backing

Accounting Principles: A Business Perspective 431 A Global Text