Question

uuu juu explain this situation to the president? 2. At the beginning of the year, Mandela Company purchased a new building and some expensive new machinery. An officer of the firm has asked you whether this purchase will affect the firm's year-end income statement. What answer would you give?

Answer 1

Building and Machinery, both are fixed or non current assets. They come under Property, Plant & equipment section in the Balance sheet. When a fixed asset is purchased, it is recorded at the price paid to acquire it. This cost is not expensed entirrly in the year of purchase. Rather it is spread over the life for which the related asset is used. This yearly allocation of the asset's cost over its useful life is called as Depreciation expense. The deprecaition amount or yearly allocated amount is charged to the income statement every year.

So, income statement will be reduced by the depreciation expense (allocated cost) of the asset each year.