Question

When a firm bought a non-current asset, for example a car, and paid full price $50 000, the accounts would not record the $50 000 as expenses in the year. How do the accounts record the expenses of using the car, and how is it shown in the income statement?

Answer 1

Answer :

Firstly, a non current asset is capitalized in Balance sheet when it is purchased. $50,000 is shown as non-current asset in balance sheet.

After initial reognition, at the end of each year accounts record the expenses of using the car as 'Depreciation expense'. Depreciation is expensing of an asset throughout its useful life. It is normally, refers the allocation of cost of assets to period in which assets are used.

Depreciation is shown in the income statement as 'Expense'. It reduces the business profit of business organization.

Recording of Depreciation expense in the books of accounts as follows :

Depreciation expense Dr

..........Accumulated depreciation-Car