Depreciation

Fixed assets A long term asset that is used up through the course of time Businesses need to account for the use of these objects, but have difficulty doing so because you can not take an inventory on how much a machine has been used up

Example – A business buys a printer for $150 over five years they use the printer and then sell it at the end of five years for $35 – Clearly this printer has lost value over the time it was used and the depreciation of that value needs to be accounted for and recorded to balance the ledger

Example Cont = $115 has been lost to depreciation and will be recorded in a depreciation expense account

Recording Depreciation Managers and owners want to know what their company is worth on a month to month basis They need to be able to evaluate each asset for what it is worth in present state, not what they paid for it when they bought it Accountants need to be able to calculate the current value of assets and record the depreciation expense for each year

Calculating Depreciation There are two methods to calculating depreciation – Straight line depreciation (by $ amount) – Declining balance depreciation (by % amount) Straight line depreciation is calculated by taking the original cost of the asset subtracting the estimated salvage (sale) value of the asset and dividing that by the number of ears or periods it is kept Eg = 115 over 5 years (115/5)= $23 each year

The straight line depreciation method of calculating value is simple, however it is the least accurate The declining balance method is most commonly used and is required by the government of Canada This method calculates the depreciation value as a percentage of current value each year it is used (a more accurate method) Eg – $150 * 20% = $30 year 1 – $120 * 20% = $24 year 2 – $96 * 20% = $19.20 year 3

Accounting for depreciation When accounting for depreciation accountants are assigning a more accurate current value of all assets, and recording an expense figure to match the depreciation amount of the asset This is done by setting up a contra account for each fixed asset

Contra account A contra account is set up with an asset account to hold the accumulated depreciation over the years an asset is held The contra account will have an opposite balance to that which it is set up for (so a contra account for an asset will have a credit balance Eg Debit Credit – Truck Account $ – Accumulated depreciation Truck $4 000 – The current value of the truck is $16 000

Adjusting Entry for depreciation Just like adjusting entries for loss or errors depreciation requires journalised adjusting entries where the expense is recorded and the contra account is credited the change in value – Depreciation Expense (DR)$$$$ – Accumulated Depreciation (CR) $$$$