# Adjusting for Fixed Assets.  Allocation of the cost of a fixed asset over the time it is used to earn revenue  Part of the cost of purchasing a fixed.

## Presentation on theme: "Adjusting for Fixed Assets.  Allocation of the cost of a fixed asset over the time it is used to earn revenue  Part of the cost of purchasing a fixed."— Presentation transcript:

 Allocation of the cost of a fixed asset over the time it is used to earn revenue  Part of the cost of purchasing a fixed asset is an expense of every period where it is used  Cost has to be spread over the time the assets and has nothing to do with a drop in market value of an asset

 Not an exact calculation  Don’t know the exact life of an asset until the asset is not longer in use  Depreciation is based on a “best guess” estimate of useful life

 Straight line depreciation where the amount of depreciation is the same from year to year  Capital Cost Allowance method required by Revenue Canada for the amount of depreciation used in calculating income tax.

 Simplest method  Based on a formula Depreciation/yr = original cost – salvage value Estimated years of useful life

We purchase a truck worth \$40 000 with an estimated useful life of 6 years and an estimated salvage value of \$10 000. What is the depreciation for one year? Dep’n = Cost-Salvage Years Dep’n = (40 000 – 10 000)/6 = \$5 000/yr

 Used to show the amount of the cost of the fixed asset which has been depreciated in prior years  Is a contra asset account  Balance is used to reduce the “book value” of a fixed asset  Is not cash or have anything to do with cash  AKA “valuation account”  Cost of Asset – Accumulated Depreciation gives the true value or book value of asset

Use the example of a truck costing\$40 000, estimated to last for 6 years, and with a salvage value of \$10 000. Dep’n = (40 000 – 10 000)/6 = \$5 000 per year The book value of the truck after one year is cost of truck – accumulated depreciation. BV (book value) = 40 000 – 5 000 = 35 000

Depreciation Expense, Truck \$5 000 Accumulated Depreciation, Truck \$5000 It is customary to abbreviate the account titles using Dep’n for Depreciation and Acc. for accumulated.

 All fixed assets except land are subject to depreciation  Entry for Depreciation is Dep’n Expense, Asset xxxx Acc. Dep’n, Asset xxxx Format remains the same, just insert the type of fixed asset

Two methods:  Half year convention—Record half a year’s depreciation in the year you buy a fixed asset no matter what month you buy the asset and another half year’s depreciation when you sell the asset  Based on months in the year  Monthly statements are based on one month