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