Capitalizing vs Expensing

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nitinsiwach

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In terms of long lived assets can somebody provide a detailed example, taking the same event, of how the journal enteries would look if it is capitalized vs how they would look if expensed.
Would put things into perspective, right now i have confusions( very basic) for eg. why are assets higher in capitalizing, i mean you reduce cash and increase asset so assets should remain the same??
 
Company A and Company B are identical. They each buy $1 million worth of pencils, but Company A expenses them while Company B capitalizes them and depletes them over 5 years. (Depletion’s like depreciation, but for assets that get used up, like oil reserves.)
Company A’s journal entry:
  • Debit: Office Expenses $1,000,000
  • Credit: Cash $1,000,000
Company A’s assets are now $1,000,000 less than they were 10 minutes ago.
Company B’s initial journal entry:
  • Debit: Pencils (asset) $1,000,000
  • Credit: Cash $1,000,000
Company B’s assets are the same as they were 10 minutes ago: $1,000,000 higher than Company A’s.
Company B’s end-of-the-year journal entry (assuming straight-line depletion):
  • Debit: Depletion Expense $200,000
  • Credit: Accumulated Depletion, Pencils $200,000
(Note: for depletion, they may just credit the asset account – Pencils – directly.)
Now Company B’s assets are $800,000 higher than Company A’s.
Also, Company B’s EBT is $800,000 higher than Company A’s.
 
S2000magician wrote:
Company A and Company B are identical. They each buy $1 million worth of pencils, but Company A expenses them while Company B capitalizes them and depletes them over 5 years. (Depletion’s like depreciation, but for assets that get used up, like oil reserves.)
Company A’s journal entry:
  • Debit: Office Expenses $1,000,000
  • Credit: Cash $1,000,000
Company A’s assets are now $1,000,000 less than they were 10 minutes ago.
Company B’s initial journal entry:
  • Debit: Pencils (asset) $1,000,000
  • Credit: Cash $1,000,000
Company B’s assets are the same as they were 10 minutes ago: $1,000,000 higher than Company A’s.
Company B’s end-of-the-year journal entry (assuming straight-line depletion):
  • Debit: Depletion Expense $200,000
  • Credit: Accumulated Depletion, Pencils $200,000
(Note: for depletion, they may just credit the asset account – Pencils – directly.)
Now Company B’s assets are $800,000 higher than Company A’s.
Also, Company B’s EBT is $800,000 higher than Company A’s.
Click to expand...

for company A right now the balance sheet is blannced but what of the pencils they have acquired where do the pencils get reported.
 
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