What is the impact of failing to record depreciation on certain machinery?

Failing to record depreciation on machinery has implications for both the income statement and the balance sheet.

On the income statement, depreciation is treated as an expense that reduces net income. If depreciation is not recorded, expenses are understated, leading to inflated profits. This misrepresentation of income can mislead stakeholders about the company's financial performance.

On the balance sheet, machinery is recorded as a fixed asset. If depreciation is not accounted for, the carrying amount of the machinery will remain higher than its actual economic value. Consequently, this leads to an overstatement of total assets. Over time, as machinery ages, it loses value, and failing to reflect this through depreciation means that the asset's book value does not accurately represent its worth.

Thus, neglecting to record depreciation affects both financial statements, leading to inaccurate reporting of profitability and asset value, which is vital for decision-making by users of the financial statements.