Adjusting for Depreciation of Long Term Assets Accounting 12

Have a long lifespan, therefore their purchasing cost should be spread over many years in matching it to the revenue that is produced by it. DEPRECIATION- allocating (spreading) the cost of a long-term asset over its productive life Long term Assets

WHY DO WE HAVE TO RECORD DEPRECIATION? Matching Principle Match Revenues to Expenses WHY DO WE HAVE TO RECORD DEPRECIATION?

Example pg 302 Mohammed purchases a new van for $24,000 After 5 years the owners sells the van for $1500. Over the course of the 5 yrs the van cost the business $24,000- selling price $1500 $22,500 helped earn revenue over the past 5yrs, so this could be considered an expense Example pg 302

Straight-Line Depreciation Divide the net cost of the asset equally over the years of the asset’s life in the business. $22,500 / 5 = $4500/ year Straight-Line Depreciation

Adjusting for Depreciation Reduce the Asset account Van by the depreciation amount $4500 (credit) Increase the Expense account Depreciation Expense- Van for that asset $4500 (debit) Adjusting for Depreciation

Accumulated Depreciation Account Change to the Balance Sheet Long Term Assets Van $24,000 Less: Total Depreciation $4500 $19,500 Change in T-Charts/ Ledger New contra account: Accumulated Depreciation- Van $4500 (credit) Depreciation Expense- Van $4500 debit Accumulated Depreciation Account

Adjusting Entry in Gen. Journal Depreciation Expense-Van $4500 Accumulated Depreciation-Van $4500 Adjusting Entry in Gen. Journal

Adjusting the Income Statement Add Depreciations Adjusting the Balance Sheet Add Accumulated Depreciation Pg. 307 Adjusting the Income Statement

Depreciation Part Year Need to calculate depreciation monthly $4500 for one year /12 months= $375 Depreciation Part Year

Declining Balance Depreciation Calculating depreciation by % per year This is more realistic as item loose value as they get older, but not at the same rate every year. See page 309 Declining Balance Depreciation

For tax purposes an item bought in the first year is deemed to be had for the entire year. CRA deems the national average in depreciation for the first year is 50%, which means only 50% of the value of the item can be depreciated. As a result the depreciation expense is great in the early years, but evens out in the later ones. * The half yr rule offers businesses an advantage if assets are bought near the end of the year… encourages businesses to Pg. 310 Half Year Rule