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Depreciation refers to the decrease in value of fixed assets over their useful life. This concept applies to assets like office furniture, automobiles, and buildings, but not land. Businesses use depreciation to reflect the original cost of assets and to keep financial statements updated. There are several methods to calculate depreciation, including Straight Line and Declining Balance. Each method serves to track the asset's value and prepare accurate financial records. Understanding depreciation is crucial for proper asset management and financial reporting.
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Decreasing the value of a fixed asset over its useful life What is Depreciation?
FIXED ASSETS • Examples: • Office Furniture • Automobile • Building • Except Land • We do not depreciate land What do we Depreciate?
To show original cost of fixed assets and amount used up over fiscal period • To help financial statements up-to-date Why do we Depreciate?
Straight Line Depreciation - Divides up the net cost of the asset equally over the years of the assets life • Declining Balance - A method of calculating the annual depreciation of an asset as a fixed percentage of the remaining value of the asset Methods of Depreciation
Eg. A business purchases a new company car on January 1, 2006. Straight Line -- Estimate value of asset at end of its useful life Cost – Salvage Value Estimate life in years Jan. 01, 2006 Cost of car $20 000 Estimated Salvage Value $5 000 Estimated Years of Life 5 Years 20 000 - 5 000 5 years Straight Line
Keeps track of total deprecation “CONTRA ASSET” (CR) 20 000 - 5 000 = 3 000 5 years Expense I/S Salvage Value
Accumulated depreciation account is a valuation or contra account, that keeps track of total depreciation • Valuation- one that is used, together with an asset account to show true net value of asset Accumulated Depreciation
Jan 01 – Journalize the purchase of the automobile. • Dec. 31, 2006 – Journalize the adjustment to record the 1st year of deprecation Automobile 20 000 Bank 20 000 Adj. Entry Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000 Contra Asset
Dec. 31 2007, 2008, 2009, 2010- Journalize the adjusting entries for depreciation for each following year. Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000 All the same!!
Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for $5 000 Bank 5 000 Acc. Dep.- Auto 15 000 Automobile 20 000
Declining Balance – • Eg. Auto- 30% Government %, pg. 308 in text + 4 200 + 2 940 + 2 058 B) Declining Balance + 1 440.60
Journalize the adjusting entries to record the depreciation for: • Dec. 31, 2006 (year 1) • Dec. 31, 2007 (year 2) Depreciation Expense- Auto 6 000 Accumulated Deprecation- auto 6 000 Depreciation Expense- Auto 4 200 Accumulated Deprecation- auto 4 200
Dec 31, 2008 (year 3) Depreciation Expense- Auto 2 940 Accumulated Deprecation- auto 2 940
Answer the following: • How much depreciation was accumulated (contra asset) after year 3? • $13 140 • How much depreciation was used up in year 3? • 2 940 (expense)
Depreciation calculations are recorded in the Adjustment Columns on the worksheet. You must extend these entries to the appropriate columns! Depreciation Expense- Auto will extend to the __ side of the __________ because it is treated like any other ______. (p. 307) Accumulated Depreciation- Auto is extended to the __ side of the ____________. Accumulated Depreciation is an example of a _____ account because it has the opposite balance of normal assets. (p.307) DR Income Statement Expense CR Balance Sheet Contra
8.4 Depreciation pg. 301-310 • Read p. 306-307 in textbook, review the worksheet, income statement & balance sheet • Answer Exercise questions #1,2 p. 311-312 (t), p. 242-244 (w) Let’s Try it!
