Equipment is purchased which has an initial cost of 125000 I

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.

Solution

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