CAPITAL ACCOUNTS 73 
  
§ 5 
We have seen that the effect upon the balance sheet of 
an increase in the value of the assets was to swell the sur- 
plus or the undivided profits. Reversely, a shrinkage of 
value tends to diminish those items. For instance, if the 
plant of a company having a capital of $100,000 and a 
surplus of $50,000 depreciates to the extent of $40,000, the 
effect on the books will be as follows: — 
ORIGINAL BALANCE SHEET 
Assets Liabilities 
Plant . . . . . $200,000.00. Debts + wie ow: /$150,000.00 
Miscellaneous . . 101,256.42 Capital . . . . 100,000.00 
Sorplus coe 50,000.00 
Undivided profits 1,256.42 
$301,256.42 $301,256.42 
PRESENT BALANCE SHEET 
Assets Liabilities 
Plant «+ + + + $160,000.00 Debts . . . . $150,000.00 
Miscellaneous . . 101,256.42 Capital . . . . 100,000.00 
Surplus... .-. 10,000.00 
Undivided profits 1,256.42 
$261,256.42 $261,256.42 
Here the shrinkage in the value of the plant, as recorded 
on the assets side, comes out of the surplus as recorded on 
the liabilities side. 
In case the surplus and undivided profits have both 
been wiped out, the capital itself becomes impaired. In 
this case the bookkeeper may indicate the result by scaling 
down the capitalization. This sometimes occurs in banks 
and trust companies, but not often in ordinary business. It 
is often avoided by making up the deficiencies through 
assessment of stockholders or postponement of dividends. 
This is required by law in many cases, as in that of insurance 
companies. Dishonest concerns, however, often conceal the 
true state of the case by the reverse process of exaggerating