By Admin on Apr 30, 2009 in Other - Business & Finance
Stephan Wehner asked:
Let’s say a company has at the beginning of a year
Let’s say a company has at the beginning of a year
$100 in Cash
$100 in Inventories
——————————
$200 in Total Current Assets
$100 in Amortized Equipment
——————————
$300 in Total Assets
Suppose that throughout the year, there is no business activity.
So at the end of the year there is still $100 in cash, $100 in inventories, but the amortized equipment has dropped to $70 (assuming a amortization rate of 30%) .
So at the end of the year we have
$270 – Total Assets
Now Assets are supposed to be equal to Liabilities + Equity (“Balance Sheet Equation”).
Since there has been no activity, there is no change in liabilities or equity.
How does the Balance Sheet equation work out at the end of the year?
The equity (retained earnings) would go down $30 dollars. The ammortized depreciation is an expense, it is activity by definition. So the company would have $0 income, $30 expense, for a loss of $30, which lowers equity by $30.
Hope this helps.
Robbert Hobbemeister | May 2, 2009 | Reply