for example, a purchase of a franchise will be amortize over n years. when I see it, it actually capitalize the expense. in the case, the pv of expense will be added into asset and liability. so equity should unchanged. but when I do some excersise, the quity will be increased. which imply that asset got increase, but not liability. if so, where to put those future liability of amortized payment? Thanks.
Your example is not really capitalization of expense. A better example is you spend a lot of money repairing a building. You can either expense it Debit: expense Credit: cash or, if the repairs meet certain requirements they might be capitalized. Debit: building improvements (an asset) Credit: cash In the second case, only the current years amortization is recorded into the income statement, which obviously is a fraction of the total amount spent. since income is higher in case 2, retained earnings is higher as net income from the current year gets added to opening reatined earnings In your example, what you have is buying a franchise which is either expensed (probably wrong way to account for it), or capitalizaed and amortized. The wrong entry is: Debit: expense Credit: cash the right one is Debit: franchise owned (an asset) Credit: cash There is no accoutns payable involved (unless you didn’t pay cash upfront and you replace cash with AP in both situations), but once again it is the action of putting the debit on the balance sheet instead of income statement that efects retained earnings. The credit side is the same whether you capitalize or not