Suppose we were to change asset depreciation on buildings and furniture and equi

Question

Suppose we were to change asset depreciation on buildings and furniture and equipment from 5% and 10% to 4% and 8%, respectively. What would be the effect on net income? Would it increase or decrease? Likewise, suppose that our estimate of the balance in Allowance for Bad Debts was reduced from $1,100 to $ 1,000. What would be the effect on net income? Is the adjusting entry process an exact science, where accountants can determine exactly how well a company has done for a period? Or, is accounting an art that requires significant judgment on the part of the accountant? What are the dangers for the accountant when making an estimate in an area (such as, bad debts) where significant judgment is required?

Explanation / Answer

If we would increase our depreciation rates , our net income will decrease as we will book more depreciation.

If we would reduce our balance in allowance for bad debt it will put a reversal effect on expenses already boked thereby inreasing net income.

Adjusting entries passed are an art as these are based on significant judgements on the part fo accountants.

If Judgement proves wrong , i.e. if there arises more losses as estimated, companies net income will fall drastically

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