8.4 Depreciation

What is Depreciation? Decreasing the value of a fixed asset over its useful life

What do we Depreciate? FIXED ASSETS ◦Examples:  Office Furniture  Automobile  Building ◦Except Land  We do not depreciate land

Why do we Depreciate? To show original cost of fixed assets and amount used up over fiscal period To help financial statements up-to-date

Methods of Depreciation A. Straight Line Depreciation - Divides up the net cost of the asset equally over the years of the assets life B. Declining Balance - A method of calculating the annual depreciation of an asset as a fixed percentage of the remaining value of the asset

Straight Line Eg. A business purchases a new company car on January 1, Straight Line -- Cost – Salvage Value Estimate life in years Estimate value of asset at end of its useful life Jan. 01, 2006 Cost of car $ Estimated Salvage Value$5 000 Estimated Years of Life5 Years years

Salvage Value Year Cost - Depreciation Used =Net Book Value Accumulated Depreciation 2006$ = years Expense  I/S Keeps track of total deprecation  “CONTRA ASSET” (CR)

Accumulated Depreciation 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

Jan 01 – Journalize the purchase of the automobile. Dec. 31, 2006 – Journalize the adjustment to record the 1 st year of deprecation Automobile Bank Depreciation Expense- Auto3 000 Accumulated Deprecation- Auto Adj. Entry Contra Asset

All the same!! Dec , 2008, 2009, Journalize the adjusting entries for depreciation for each following year. Depreciation Expense- Auto3 000 Accumulated Deprecation- Auto 3 000

Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for $5 000 Bank Acc. Dep.- Auto Automobile

B) Declining Balance Declining Balance – Eg. Auto- 30% Government %, pg. 308 in text Year Cost - Depreciation Used =Net Book Value Accumulated Depreciation 2006$ ( *.3) = ( *.3) (9 800*.3) (6 860*.3) (4802*.3)

Journalize the adjusting entries to record the depreciation for: Dec. 31, 2006 (year 1) Dec. 31, 2007 (year 2) Depreciation Expense- Auto Accumulated Deprecation- auto Depreciation Expense- Auto Accumulated Deprecation- auto 4 200

Dec 31, 2008 (year 3) Depreciation Expense- Auto Accumulated Deprecation- auto 2 940

Answer the following: ◦How much depreciation was accumulated (contra asset) after year 3?  $ ◦How much depreciation was used up in year 3?  (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) CR Income Statement Expense DR Balance Sheet Contra

Let’s Try it! 8.4 Depreciation pg Read p in textbook, review the worksheet, income statement & balance sheet Answer Exercise questions #1,2 p (t), p (w)