Depreciation

Nature of Depreciation Fixed Assets for a business are expected to be used up in the course of time. Thus depreciating in value.depreciating Example: Truck

Calculating Depreciation Can only be calculated exactly at the end of an asset’s life to see how many years it was used and to determine its final worth. However, must be included on every year-end income statement.

Methods Straight-Line Method of Depreciation is the simplest way of calculating depreciation. Straight-Line Method of Depreciation Divides up net cost of the asset equally over the years of the asset’s life. Straight Line = Original cost - Estimated Salvage Value Estimated number of periods in the life of the asset

Adjusting for Depreciation Set up Depreciation Expense Account for asset Reduce asset’s value E.g. Depreciation Expense –Truck Truck *done to meet the requirements of the Matching Principle *Only for small businesses

Accumulated Depreciation Account Additional information is required. New account Accumulated Depreciation is made. Depreciation Expense – Truck Accumulated Depreciation – Truck This is known as a valuation or contra account.valuationcontra account. The balance for Accumulated Depreciation is a credit.

Adjusting Entry for Depreciation Steps: 1. Records the depreciation for the period in a depreciation expense account. 2. Increases the appropriate accumulated depreciation account for asset, which reduces net book value. Depreciation Expense (Asset) $$$$ Accumulated Depreciation (Asset)$$$$

Depreciation on Financial Statements Depreciation expense appears on the Income Statement. Accumulated depreciation that is deducted from its fixed asset account appears on Balance Sheet.

Declining Balance Depreciation Common:  Used for income taxation by regulation of the Government Calculated by multiplying the remaining undepreciated cost of asset by a fixed percentage. Class Description Rate 3Bldg. of brick stone or cement 5% 6Bldg. of frame, log, or stucco 10% 8Office Furniture and equipment20% 10 Automobiles, trucks, tractors, computers30% 12 Computer software (except systems software)100%

50% Rule Ap plies to assets purchased part way through the year The asset is multiplied by 50%  The depreciation rate (%) is multiplied by the above determined figure Example A car is purchased in June $ * 50% = $ $ * 30% = $5 250

Definitions DepreciationDepreciation – The decrease in value of a fixed asset over time. this is calculated according to a mathematical formula. Straight-Line method of depreciation Straight-Line method of depreciation – A mother of calculating the depreciation of an asset whereby the depreciation is apportioned equally to each year of the asset’s life. Contra Account Contra Account – account that must be considered along with a given asset account to show the true book value of the asset account.

Continued… Valuation Valuation – account that is used together with an asset account to show true net value of the asset. Declining Balance Declining Balance – method of calculating the annual depreciation of an asset as a fixed percentage of the remaining value of the asset. Annual depreciation becomes progressively smaller.