Compare Two Balance Sheet Valuations
Consider two different valuations for the same asset, and how the difference impacts the balance sheet. Refer to the balance sheet shown. The business uses the straight-line depreciation method, by which an equal amount of depreciation is allocated to each year of a fixed asset’s estimated useful life.
Assume the business had used an accelerated depreciation method for its fixed assets instead. In this case, $700,000 more in depreciation would be expensed, using the accelerated method. The change in depreciation method results in several changes in the balance sheet, as shown:
Depreciation expense over the years would be $700,000 higher. As a result, accumulated depreciation is $700,000 higher ($2,100,000 versus $1,400,000).
Using accelerated depreciation reduces the total value of assets. With that method, total assets are $7,300,000, compared with $8,000,000 total assets by using straight-line depreciation.
The higher amounts of depreciation expense reduce cumulative net income by $700,000. Lower net income means that retained earnings is also lower ($1,500,000 versus $2,200,000).