Question

Slide 5 chapter 1: A Framework for Financial Accounting Describe the role that financial accounting plays in the decision-making process Knowledge Check Question 2 ot 4 Which of the following is an important indicator of a company management's ability to respond to business situations and the possibility of bankruptcy? Inventory Accumulated depreciation Total stockholders' equity Total liabilities Slide 5 -

Answer 1

Accumulated depreciation

Fixed assets are usually depreciated over their useful life. When depreciation is booked the entry is :

DR Depreciation Expense

CR Accumulated Depreciation

Accumulated depreciation is a Contra Asset Account and is reported on the Balance Sheet. Every-time you depreciate the asset, the account balance of the accumulated depreciation adds up. The gross value of the fixed asset less accumulated depreciation is the Net asset reflected on the Balance Sheet. So at the end of the useful life of the asset the net asset value is zero.

For example if the useful life of asset is 3 years, every year 1/3rd of the value of the asset is depreciated and added in the accumulated depreciation account. At end of 3 years the accumulated depreciation account balance will be a credit balance of the total value of asset. So at end of year 3 the net value of the asset on the balance sheet will be zero.