Depreciation
description
Transcript of Depreciation
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Depreciation
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What is depreciation?
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Non-current assets
Vehicles, computers, equipment, shop fittings etc (are controlled by the business) and provide future economic benefit for the business for more than 12 months.
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But.......They do not last forever, as they
• age• wear out • lose value over time and • their ability to earn revenue.
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Every year....
• Part of the value of the non-current asset is consumed over time
• Therfore the annual consumption becomes an expense
• Depreciation calculates this annual consumption (expense)
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On 1st July 2014, Woodrow Farm purchased a computer for $3,000 (plus $300 gst) cash. It will be kept for 3
years and estimated it is worth $0 after 3 years
Non current asset:- a future economic benefit to the farm, controlled by the farm and will benefit the farm for more than 12 months.
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Computer has life of 3 years. Why?
• the value of the computer consumed should be written off each year as an expense called depreciation
• the unconsumed portion is reported as a non current asset
Depreciation - the allocation of the cost of a non-current asset over its useful life.
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Purpose
• Ensure that an accurate (reliable) profit is determined by calculating the expense that is inccurred in the current reporting period.
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How to calculate depreciation?
The formula:-
Historical cost less scrap value Useful Life
Depreciation of the computer would be:$3000 less $0
3$1,000 per year
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The ledger accounts affected
• Depreciation – shows the annual expense (debit entry)
• Accumulated depreciation – displays the reduction in the value of the computer ie a ↓ in asset (credit entry)
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How it would look in the first 12 months?
Depreciation
Accumulated Depreciation
1 Jul 15
$1000Depreciation
$1000Accumulated Depreciation
1 Jul 15
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Reporting time:- - close revenue and expense accounts,- balance assets, liabilities
Depreciation (expense)
Accumulated Depreciation (↓ asset)
1 Jul 15
$1000Depreciation
$1000Accumulated Depreciation
1 Jul 15
P and L Summary30 Jun 16 $1000
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After three years, the ledgers would look like.....
Depreciation of Computer
Accumulated Depreciation of Computer
30 Jun 15
$1000Dep of computer
$1000Acc Dep computer
1 Jul 15
$1000Acc Depn computer
P and L Summary30 Jun 16 $1000
$1000
$1000 $1000
$3000
1 Jul 16 $1000
$3000
$1000Dep of computer
Dep of computer1 Jul 17
Acc Depn computer
P and L Summary
P and L Summary
30 Jun 16
30 Jun 1730 Jun 17
30 Jun 16
1 Jul 17 Balance $3000
1 Jul 18 Balance $3000
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The Balance Sheet
Year 1
Non current assetsComputer $3000 Less accumulated depreciation $1000
$2000
Historical cost
Carrying value
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The Balance Sheet
Year 2
Non current assetsComputer $3000 Less accumulated depreciation $1000
$2000
Historical cost
Carrying value
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The Balance Sheet
Year 3
Non current assetsComputer $3000 Less accumulated depreciation $3000
$0
Historical cost
Carrying value
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Impact on Owners’ Equity
• Depreciation expense reduces profit therefore decrease Oe
• Depreciation reduces the value of the asset therefore accumulated depreciation shows this.