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Under the double-declining balance method, the book value of the trailer after three years would be $51,200 and the gain on a sale at $80,000 would be $28,800, recorded on the income statement\u2014a large one-time boost. Under this accelerated method, there would have been higher expenses for those three years and, as a result, less net income. This is just one example of how a change in depreciation can affect both the bottom line and the balance sheet. Companies have several options for depreciating the value of assets over time under GAAP.<\/p>\n<\/p>\n
A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as \u201cother expenses.\u201d A positive section 481(a) adjustment results in an increase in taxable income. Instead, the cost is placed as an asset onto the balance sheet and that value is steadily reduced over the useful life of the asset. This happens because of the matching principle from GAAP, which says expenses are recorded in the same accounting period as the revenue that is earned as a result of those expenses. The accumulated depreciation account is a contra-asset account on a company’s balance sheet. It represents a negative balance, offsetting the gross amount of fixed assets reported.<\/p>\n<\/p>\n