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
Equipment is $22 000; useful life is 10 years; and salvage value is $2 000 Dep’n = (22 000 – 2 000)/10 = $2 000 Automobile is $21 000; useful life is 5 years and salvage value is $6 000 Dep’n = (21 000 – 6 000)/5 = $3 000