Question

Equipment is purchased which has an initial cost of $125,000. It has a 10 year life and its salvage value is estimated to be $12,000. Determine the initial and annual entries in the accounting equation.

Answer 1

The initial entry would be based on purchasing asset. In such case the equipment account should be debited, since it is an asset and increases; and cash account should be credited, since it is asset and decreases. The amount would be $125,000.

The annual entry would be based on depreciation, which is the wear and tear of an asset. Suppose the depreciation is calculated on straight line basis; therefore, the amount would be,

Depreciation = (Cost – Salvage value) / Life years

                     = ($125,000 - $12,000) / 10

                     = $113,000 / 10

                     = $11,300

The amount of depreciation decreases retained earnings, so as to decrease capital account; and it reduces the value of equipment; therefore, assets account should be decreased.

Accounting equation would be as below:

Assets = Liabilities + Capital

	Assets =	Liabilities +	Capital
Initial entry	+ $125,000 Equipment; - $125,000 Cash	0	0
Annual entry	-$11,300 Equipment		-$11,300 Retained earnings