# Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 Chapter 6 Depreciation.

## Presentation on theme: "Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 Chapter 6 Depreciation."— Presentation transcript:

Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 Chapter 6 Depreciation

Definition Depreciation is the ‘ allocation of the depreciable amount of an asset over its estimated life ’.

The Objective of Depreciation According to the matching concept, revenues should be matched with expenses in order to determine the accounting profit. The cost of the asset purchased should be spread over the periods in which the asset will benefit a company.

Depreciation Methods (A) Straight Line Method (B) Reducing Balance Method/Diminishing Balance Method (C) Revaluation Method (D) Sum of Digits Method/Sum of The Years ’ Digits Method (E) Production Output Method/Units of Production Method

(A) Straight Line Method Depreciation is computed by dividing the depreciable amount of the asset by the expected number of accounting periods of its useful life. Depreciation = Cost of Asset – Estimated Residual Value Estimated Useful Economic Life

Useful Economic Life Useful economic life is not equal to physical life It is the period over which the present owner intends to use the asset

Residual Value It is the amount received after disposal of the asset Cost of asset - Residual value = Total amount to be depreciated

Example Cost of asset \$1200 Residual/scrap/salvage value \$200 Estimated useful life4 years Annual charge for depreciation = \$1200-\$200 4 = \$1000 4 =\$250

Accounting for Depreciation Fixed assets other than land lose their ability over time to provide services Costs of equipment, buildings, and land improvements should be transferred to expense accounts in a systematic manner during their expected useful lives. DEPRECIATION Adjusting entry to record depreciation is usually made at the end of each month or at the end of the year Fixed assets other than land lose their ability over time to provide services

Adjusting Entry AccountDebitCredit Depreciation expense \$7,000 Accumulated depreciation - truck\$7,000

Depreciation Accumulated depreciation Shows the amount that the asset has lost in value since its purchase Depreciation expense Shows the amount that the asset has lost in value this period.

Factors in Computing Depreciation Expense The fixed asset’s initial cost Its expected useful life Its estimated value at the end of its useful life.

Depreciation Methods Straight line Declining balance Units of production

Straight line Method Provides for the same amount of depreciation expense for each year of the asset’s useful life Annual depreciation expense = Cost – Salvage value Life

Example 1 A machine had a cost of \$24,000, salvage value of \$2,000 and useful life of 5 years Annual depreciation expense = Cost – Salvage value Life = \$24,000 - \$2,000 5 years = \$4,400 annual depreciation

Adjusting entry AccountDebitCredit Depreciation expense\$4,400 Accumulated depreciation - truck\$4,400

Example 2 A machine had a cost of \$30,000, salvage of \$5,000 and useful life of 6 years. Compute depreciation under the straight line method? What is depreciation expense in year 3?

Disposal of Fixed Assets Discarding of Fixed Assets When asset has no residual value and is fully depreciated.

Example 8 Asset with a cost of \$25,000 and fully depreciated is discarded AccountDebitCredit Accumulated Depreciation\$25,000 Fixed Asset\$25,000

End of this chapter Very thanks 20