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Accounting equation problems

RishebhKumar (Studying) (128 Points)

26 February 2014

Depriciation reduces assets on assets side and capital on liability side.My question is why does it affect capital when charging dep. is a liability so it should affect liability on liability side...So confused need your help..please And thanks in advance

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4 Replies

Sonu Jain (article assistant) (22 Points)
Replied 26 February 2014

It affects capital Indirectly because, depreciation is a charge to P&L a/c , as a result profit is affected because of this expense. hence depriciation affects both asset and liability side.

Ashok (Industry) (416 Points)
Replied 26 February 2014

another way of looking at it is - depreciation (accumulated) is shown as a contra-asset, which means it reduces asset. Depreciation is also an expense, hence reduces profits, therefore capital.

mahendra jangid (Dy. General Manager (Finance)) (444 Points)
Replied 26 February 2014

First of all depriciation is not a liability. Its a charge on the assets. Thus if you show assets on gross block basis, Depreciation A/C is debited and Accumulated Depreciation is credited. For the purpose of presentation, it is reduced from the gross block...

Ashok (Industry) (416 Points)
Replied 27 February 2014

The idea of depreciation accumulated is in a sense a 'liability' of the future outflow of resources due to complete wear and tear of the asset and the need to replace it in the future. It's not a legal liability but a future outflow of resources due to the need to acquire new assets and replace existing ones. Some companies create an investment equal to the accumulated depreciation which can be earmarked for asset acquisition. It is suprising why accountants merely look at it as a charge against assets but don't question why a accumulated depreciation is carried and shown as a deduction from assets.