Question

What would happen if I were to buy a truck for $50,000 and expense all of it during that period, rather than handle it the way the book recommends? What would it do to my Income Statement, Balance Sheet, etc?

Answer 1

We capitalize fixed assets using materiality principle. as we use fixed assets for more than one accounting year and amount incurred for purchase of this is also huge. Hence, we require to capitalize such expenditure to shown true and fair view in financial statement.  We also charged depreciation on fixed assets ,here truck, to spread its cost over its useful life. So that it complies with matching principle of accounting.

Here in given question, if we book truck as an expense than it is non compliance of materiality & matching principle. Full value of truck comes under income statement and shown incorrect view of financial statement.

So, purchase of truck should be capitalize and depreciation charged on it should comes as an expense in income statement. Then it will give true and fair view.

I hope this clarifies your question. Pls rate the answer and comment in case of any doubt.