Assets = equity + liabilties
When a firm purchases an asset and capitalises it, I understand the value of the asset (determined by the purchasing cost) gets added to the asset side of the balance sheet.
Can someone walk me through the impacts on the equity and liabilities side of the balance sheet? If stockholders equity rises, how?
Net income is higher (no expense), so equity is higher.
Liabilities aren’t affected.
the impact is at the supplier position
On the initial aquisition it depends how it was paid for
In cash
One asset down - CASH
One asset up - Machine
With debt (probably raise debt, which becomes cash and is spent on machine) Net effect
Asset up - machine
Debt up - new debt.
Then over time
Depreciation
Reduces value of assets via depreciation.
Reduces value of equity (via deprn expense in income statement)