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 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 $ with an estimated useful life of 6 years and an estimated salvage value of $ What is the depreciation for one year? Dep’n = Cost-Salvage Years Dep’n = ( – )/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 $ Dep’n = ( – )/6 = $5 000 per year The book value of the truck after one year is cost of truck – accumulated depreciation. BV (book value) = – =

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

Adding Depreciation to the Worksheet

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

Adding Depreciation to the Worksheet