2.  What is it?  First let’s remember our definition for an expense  Something that we spend money on to make money  Based on this definition shouldn’t things like equipment or cars be expenses? We use these things to make money do we not?

3.  However, items such as a car don’t suddenly become worthless – it loses some of it’s value each year  So, a portion of the cost of the equipment should be allocated as an expense in each year of the item’s life  Like our prepaid accounts – this ensures the business meets the matching principle

4. Depreciation  an allowance made for the decrease in value of an asset over time Depreciation is an expense so it appears on the INCOME STATEMENT  Depreciation Expense – Debit Account

5.  Since there was a debit – we now know we need a credit  This sets up another new account  Accumulated Depreciation for each asset will be established ....just for the ones that are worth less over time (equipment, automobiles, etc)  Accumulated Depreciation is our 2 nd CONTRA account

6.  Accumulated Depreciation is a contra account to the asset it is depreciation  It takes away value from the overall account of the asset Automobile15000 Less: Accumulated Depreciation 800 14200

7.  The amount to depreciated every fiscal period is not always given  Methods for calculation  2 most common are: ▪ Straight Line ▪ Declining Balance

8.  Straight Line Method  Divides up the net cost of the asset equally over the years of the assets life Straight Line for 1 yr = (orig cost - estimated salvage value) Estimated # of periods in the asset’s life

9.  Straight line Example  Tip Top Trucking purchased a truck for $78000 on Jan 1. 2011. Truck could be used for 6 years, and be sold at that time for $7800.  Therefore: Estimated Annual Depreciation is ($78000 – $7800) / 6 = $11700 The truck will depreciate $11700 each year.

10.  Recording Depreciation Journal Depreciation Expense – Truck11700 Accumulated Depreciation - Truck11700

11.  So the entry will look like this: Journal Depreciation Expense – Truck 11700 Accumulated Depreciation - Truck11700 The use of the accumulated depreciation account provides 2 types of information: 1) By not taking the depreciation right off of the asset account we can still find the original cost of the asset 2) We can quickly calculate the total amount of depreciation recorded over the years

12.  Adjusting Entry for Depreciation 1) records the depreciation for the period in the depreciation expense account 2)Increases the appropriate accumulated depreciation account for the asset, which reduces the asset’s net book value Journalized as… Depreciation Exp$$$$ Acc. Dep. (Asset)$$$$

13. Declining-balance Method  Allocates a greater amount of depreciation to the first years of an asset’s life  This is the method the government requires for income tax purposes  To find the depreciated amount you take the undepreciated cost of the asset and multiply it by a fixed %  This % is set by the gov’t

14.  For example  Equipment may have cost $12,000  The car is to be depreciated at a rate of 20% per year YearUndepreciated Cost Amount of Depreciation (20%) Declining Balance, End of Year 11200024009600 2 19207680 3 15366144 4 1228.804915.20 5 983.043932.16

15.  Again, the depreciation expense accounts are listed on the income statement as a debit  The Accumulated Depreciation are listed with their contra-accounts on the balance sheet  Equipment -> Accumulated Depreciation: Equipment  Acc. Depreciation is a credit account on your trial balance

16. Fixed Assets Equipmentxx Less: Accumulated Depreciation – Equipment xx xx Furniturexx Automobilexx Less: Accumulated Depreciation – Automobile xxxx Buildingxx Landxx Total Fixed Liabilitiesxx

17.  Page 218-219  Questions 3-6