Does Depreciation Affect Paid-in Capital?
Original post by Kathy Adams McIntosh of Demand Media
Companies use fixed assets in various ways throughout their business. Some companies use fixed assets in the manufacturing process, such as conveyor belts or forklifts. Other companies use fixed assets in the office, such as desks or mainframes. Service companies use vehicles as fixed assets to drive to customer sites. Fixed assets appear on the balance sheet along with accumulated depreciation. The company records depreciation expense each period to recognize the decline in value of the fixed asset. Depreciation expense makes no impact on paid-in capital.
Paid In Capital
Paid-in capital represents a portion of the money contributed from stockholders. When a stockholder purchases stock from a corporation, the company records the sale using the capital stock account and paid-in capital. The common stock account records the outstanding shares of stock at par value. The paid-in capital records the amount paid by the investor beyond the par value of the stock.
Depreciation expense refers to the gradual decline in the value of fixed assets. Companies cannot record an expense for the purchase of a fixed asset. Since fixed assets provide benefits for longer time frames, the company recognizes a portion of the depreciation each year over the asset's life. The company also recognizes the decline in the asset's value through an account called accumulated depreciation.
Impact On Stockholder Equity
Depreciation impacts stockholder's equity indirectly. The income statement calculates net income by subtracting the expenses from the revenues. All expenses appear on the income statement. As the company records more expenses, it also realizes a lower net income. At the end of each period, the company transfers the net income to the retained earnings account. A lower net income means a lower increase retained earnings. The retained earnings account appears in the stockholder's equity section of the balance sheet.
Impact On Paid-In Capital
The paid-in capital account also appears in the stockholder's equity section of the balance sheet. The only transactions that impact paid-in capital stem from the sale of capital stock. Each sale of company stock increases the paid-in capital account. Depreciation makes no impact on paid-in capital.
- Accounting Coach: Stockholder's Equity
- OF STOCKHOLDERS EQUITY Principles of Accounting: Chapter 14 Corporate Equity Accounting
About the Author
Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.