If A Company Fails To Record Depreciation Expense

If a company or business fails to record Depreciation Expense Account, then Net Income in Income Statement is overstated as no depreciation expense is recorded in Income Statement or Profit And Loss Account.

If complete journal entry of depreciation expense is omitted or not recorded, then it also affects assets side on balance sheet. As, depreciation for the period is not added to the Accumulated Depreciation so the total fixed assets on balance sheet are overstated as less accumulated depreciation is deducted from relevant fixed asset / non current asset on balance sheet.

The adjusting entry to record depreciation expense is shown below:

 

                               Depreciation Expense a/c  XXX

                                                                         Accumulated Depreciation a/c  XXX

                                                   (Depreciation Recorded for the Period)

Accumulated Depreciation is a Contra Asset Account which if not deducted from Fixed Assets or Non Current Assets on balance sheet, then assets side is overstated or in other words, total assets are overstated.

Test Your Knowledge With An Example:

If The Following Adjusting Entry Is Omitted, What Effect Will It Have On Net Income?

      Depreciation Expense a/c $4,600    

                                           Accumulated Depreciation a/c $4,600

The correct answer is (c), as due to the complete omission of adjusting entry, depreciation expense, which is a non cash item and a non operating expense, is not recorded and hence the expenses are understated by $4,600 due to which the Net Income for the period is overstated by $4,600 as less expenses are deducted from Revenues on Income Statement.