when you convert a capitalization accounting to an expensing account, the amount of (1-t)(Capitalization-Amortization) will be subtract from the net income, t is the tax rate; however when total assets and equity are adjusted, you need add back the amount of (Opening balance+Capi-Amort) and (1-t)(Opening balance+Capi-Amort) respectively. let say opening balance is the development cost for software inherited from previous year. my question is why opening balance is counted only in assets and equity adjustment, but not in net income or pretax income adjustment.
reason is because Assets and Equity lie on the Balance sheet – which carry cumulative amounts. Expense is on the Income statement – which is a periodic expense account. So on a parallel look at Depreciation Expense. On the Income statement --> Depreciation Expense is directly given in the period. If you were not given depreciation expense and had to derive it from the Balance sheet: Begin PP&E Gross + Purchases PP & E - Depreciation Expense - Book Value (Sold) = End PP & E Gross. This is how you would get the depreciation expense. CP
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