Squires & Johnson recorded 250,000 of depreciation expense in Dec2005. The most likely effect on the company’s accounting equation is: A. no effect on assets B.a decrease in assets of 250,000 C. an increase in liabilities of 250,000 the answer is B but the explanation says- it decreases assets and increases liabilities. so it means b and c. i am wondering why not a- as depreciation is a non cash account.
figured it out- it increases expenses and not liabilities
Where did you get this question from? On the B/S the only effect it will have is a reduction in the assets but indirectly it affects Owners equity since it (OE) is derived from Net Income. NOt sure what you mean by “i am wondering why not a- as depreciation is a non cash account.”
Depreciation expense decreases assets which also decreases net income & shareholders equity. It does not have anything to do with liabilities or cash since it’s a non-cash charge.
This would be the journal entry: Dr. Amortization 250,000 (expense account) Cr. Accumulated Amortization 250,000 (liability account) So, both an expense account and a liability account are increased. However, the AA account is a Contra account. This means that it is taken against the balance of a related account. The AA account is offset against the fixed asset account which will give you the net fixed assets. Net fixed assets are an Asset line item. So, even though AA is a liability account the effect of changes to it will be reflected on the Asset portion of the Balance sheet. B is the only correct answer.