1. Plant Assets and Depreciation Making Accounting Relevant The assets that a business owns help the business earn revenue. For example, a delivery truck (an asset) earns revenue for a delivery service business. What assets do you have that help you carry on your daily activities? Do these items wear out? Will they have to be replaced?

2. Section 1Plant Assets and Equipment What You’ll Learn  How to identify plant assets.  How to allocate the cost of a plant asset over its useful life.

3. Why It’s Important Assets, such as buildings and machinery, are used for more than one accounting period, so the cost of these assets is spread over a number of years. Key Terms  current assets  plant assets  straight-line depreciation Section 1Plant Assets and Equipment (cont'd.)  depreciation  disposal value

4. Current and Plant Assets Section 1Plant Assets and Equipment (cont'd.) Current Assets Assets that are either consumed or converted to cash during the normal operating cycle of the business, usually one year. Examples are:  cash  accounts receivable (collect cash from charge customers within a short period of time)  merchandise (sold within a short period of time) Plant Assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples are:  land  buildings  delivery equipment  store equipment  office equipment

5. Allocating the Cost of Plant Asset  Allocating the cost of a plant asset over that asset’s useful life is called depreciation.  All plant assets are depreciated, except for land. Section 1Plant Assets and Equipment (cont'd.)

6. Estimating Depreciation of a Plant Asset There are four factors used to calculate depreciation:  the cost of the plant asset Section 1Plant Assets and Equipment (cont'd.)  the estimated useful life of the asset  the estimated disposal value of the asset  the depreciation method used

7. Plant Asset Cost Plant Asset Cost is the price paid for the asset plus any sales taxes, delivery charges, and installation charges. Section 1Plant Assets and Equipment (cont'd.)

8. Estimated Useful Life of a Plant Asset The estimated useful life of a plant asset is the number of years the asset is expected to be used before it wears out, becomes outdated, or is no longer needed by the business. Section 1Plant Assets and Equipment (cont'd.)

9. Estimated Disposal Value of a Plant Asset The estimated disposal value of a plant asset is the estimated value of a plant asset at its replacement time is called disposal value. Section 1Plant Assets and Equipment (cont'd.)

10. Depreciation Method  Straight-line depreciation equally distributes the depreciation expense over an asset’s estimated useful life.  Units-of-production method estimates useful life measured in units of use rather than units of time.  Accelerated depreciation methods are based on the theory that an asset loses more value in the early years of its useful life than in the later years. Section 1Plant Assets and Equipment (cont'd.)

11. Section 2Calculating Depreciation What You’ll Learn  How to calculate the annual depreciation of a plant asset.  How to calculate depreciation for a partial year.  How to determine the book value of a plant asset.

12. Why It’s Important Businesses must maintain accurate records of each plant asset and its related depreciation. Key Terms  accumulated depreciation  book value Section 2Calculating Depreciation (cont'd.)

13. Calculating Depreciation To calculate depreciation, you need to know the cost of the asset, the estimated useful life, and the estimated disposal value. Original EstimatedAmount CostDisposal Valueto be Depreciated Section 2Calculating Depreciation (cont'd.) $16,500–$1,500=$15,000

14. Calculating Depreciation (cont'd.) Next calculate the annual depreciation expense using the straight-line method: AmountEstimatedAnnual to be  Useful=Depreciation DepreciatedLifeExpense Section 2Calculating Depreciation (cont'd.) $15,000  5=$3,000

15. Plant Asset Records Businesses maintain records for each plant asset and the depreciation taken for that asset. Section 2Calculating Depreciation (cont'd.)

16. Section 3Accounting for Depreciation Expense at the End of a Year What You’ll Learn  How to record adjusting entries in the general journal for depreciation.  How to record depreciation adjustments on a work sheet.  How to report Depreciation Expense and Accumulated Depreciation on financial statements.

17. Why It’s Important Adjustments are made to record depreciation. This allows businesses to present up-to-date financial information about plant assets. Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.)

18. Adjusting for Depreciation Expense After depreciation on plant assets is calculated, adjustments are made to record depreciation for the period. Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.)

19. Depreciation Expense  Depreciation Expense is an expense account.  Depreciation Expense is reported on the income statement.  At the end of the year, Depreciation Expense is closed to Income Summary. Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.)

20. Accumulated Depreciation  The balance of Accumulated Depreciation represents the total amount of depreciation expensed since the asset was purchased.  Accumulated Depreciation is classified as a contra asset account. Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.) Accumulated Depreciation Debit – Decrease Side Credit + Increase Side Normal Balance Side

21. Preparing the Adjustment for Depreciation Expense (cont'd.) Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.) Adjustment (cont'd.) On December 31, the accounting clerk for On Your Mark records the depreciation for the delivery truck. The annual depreciation expense for the delivery truck is $3,000. T ACCOUNTS 6. Depr. Expense—Accum. Depr.Delivery Equipment Debit + 3,000 Credit – Credit + 3,000 Debit –

22. Reporting Depreciation Expense and Accumulated Depreciation on Financial Statements Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.)

23. Reporting Depreciation Expense and Accumulated Depreciation on Financial Statements (cont'd.) Section 3Accounting for Depreciation Expense at the End of a Year (cont'd.)