1. Adjusting for Depreciation of Long Term Assets
Accounting 12

2. Have a long lifespan, therefore their purchasing cost should be spread over many years in matching it to the revenue that is produced by it.
DEPRECIATION- allocating (spreading) the cost of a long-term asset over its productive life
Long term Assets

3. WHY DO WE HAVE TO RECORD DEPRECIATION?
Matching Principle Match Revenues to Expenses
WHY DO WE HAVE TO RECORD DEPRECIATION?

4. Example pg 302 Mohammed purchases a new van for $24,000
After 5 years the owners sells the van for $1500.
Over the course of the 5 yrs the van cost the business $24,000- selling price $1500
$22,500 helped earn revenue over the past 5yrs, so this could be considered an expense
Example pg 302

5. Straight-Line Depreciation
Divide the net cost of the asset equally over the years of the asset’s life in the business.
$22,500 / 5 = $4500/ year
Straight-Line Depreciation

6. Adjusting for Depreciation
Reduce the Asset account Van by the depreciation amount $4500 (credit) Increase the Expense account Depreciation Expense- Van for that asset $4500 (debit)
Adjusting for Depreciation

7. Accumulated Depreciation Account
Change to the Balance Sheet
Long Term Assets
Van $24,000
Less: Total Depreciation $ $19,500
Change in T-Charts/ Ledger
New contra account: Accumulated Depreciation- Van $4500 (credit)
Depreciation Expense- Van $4500 debit
Accumulated Depreciation Account

8. Adjusting Entry in Gen. Journal
Depreciation Expense-Van $4500 Accumulated Depreciation-Van $4500
Adjusting Entry in Gen. Journal

9. Adjusting the Income Statement
Add Depreciations
Adjusting the Balance Sheet
Add Accumulated Depreciation
Pg. 307
Adjusting the Income Statement

10. Depreciation Part Year
Need to calculate depreciation monthly
$4500 for one year /12 months= $375
Depreciation Part Year

11. Declining Balance Depreciation
Calculating depreciation by % per year
This is more realistic as item loose value as they get older, but not at the same rate every year.
See page 309
Declining Balance Depreciation

12. For tax purposes an item bought in the first year is deemed to be had for the entire year.
CRA deems the national average in depreciation for the first year is 50%, which means only 50% of the value of the item can be depreciated.
As a result the depreciation expense is great in the early years, but evens out in the later ones.
* The half yr rule offers businesses an advantage if assets are bought near the end of the year… encourages businesses to
Pg. 310
Half Year Rule