Depreciation is a systematic and rational process of
distributing the cost of tangible assets over the life of
assets.
Depreciation is a process of allocation.
Cost to be allocated = acquisition cost - salvage value
Allocated over the estimated useful life of assets
Allocation method should be systematic and rational.
3. Depreciation Methods
Depreciation methods based on time:
Straight line method
Declining balance method
Sum-of-the-years'-digits method
Depreciation based on use (activity)
4. Straight Line Depreciation Method
Depreciation = (Cost - Residual value) / Useful life
Ex:
On April 1, 2011, Company A purchased an equipment at the cost
of
$140,000. This equipment is estimated to have 5 year useful
life. At the end of
the 5th year, the salvage value (residual value) will be
$20,000. Company A recognizes
depreciation to the nearest whole month. Calculate the
depreciation expenses for
2011, 2012 and 2013 using straight line depreciation method.
Depreciation for 2011 = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000
Depreciation for 2012 = ($140,000 - $20,000) x 1/5 x 12/12 =
$24,000 Depreciation for 2013 = ($140,000 - $20,000) x 1/5 x 12/12
= $24,000
5. Declining Balance Depreciation Method
Depreciation = Book value x Depreciation rate
Book value = Cost - Accumulated depreciation
For double declining balance method: Depreciation rate =
Straight line depreciation rate x 200%
6. Double declining balance depreciation
On April 1, 2011, Company A purchased an equipment at the cost
of $140,000. This equipment is estimated to have 5 year useful
life. At the end of the 5th year, the salvage value (residual
value) will be $20,000. Company A recognizes depreciation to the
nearest whole month. Calculate the depreciation expenses for 2011,
2012 and 2013 using double declining balance depreciation method.
Useful life = 5 years --> Straight line depreciation rate = 1/5
= 20% per year Depreciation rate for double declining balance
method = 20% x 200% = 20% x 2 = 40% per year Depreciation for 2011
= $140,000 x 40% x 9/12 = $42,000 Depreciation for 2012 = ($140,000
- $42,000) x 40% x 12/12 = $39,200 Depreciation for 2013 =
($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520
7. Double declining balance depreciation
8. Double declining balance depreciation
(*1) $140,000 x 40% x 9/12 = $42,000 (*2) $98,000 x 40% x 12/12
= $39,200 (*3) $58,800 x 40% x 12/12 = $23,520 (*4) $35,280 x 40% x
12/12 = $14,112 (*5) $21,168 x 40% x 12/12 = $8,467
Depreciation for 2015 is $1,168 to keep book value same as
salvage value.
$21,168 - $20,000 = $1,168 (At this point, depreciation
stops.)
9. RECORDING DEPRECIATION TRANSACTION
On April 3, the business purchased furniture on account for
$16,500. The furniture is expected to last 5 years.
16,500 Furniture Accounts Payable 16,500
10. RECORDING DEPRECIATION TRANSACTION
What is the adjusting entry on April 30?
April 30 Depreciation Expense, Furniture 275 Accumulated
Depreciation, Furniture 275 To record depreciation
11. Book Value
The net amount of a plant asset (cost minus accumulated
depreciation)
12. ACCUMULATED DEPRECIATION VS. DEPRECIABLE COST
Accumulated Depreciation = Original Cost Book Value
Depreciable Cost = Original Cost Salvage Value
Depreciable Cost > Accumulated Depreciation Book Value >
Salvage Value
Depreciable Cost = Accumulated Depreciation Book Value =
Salvage Value
Book Value NEVER SMALLER than Salvage Value
Depreciable Cost is how much an asset CAN be depreciated
Accumulated Depreciation is how much an asset HAS been
depreciated already
13. 4 DIFFERENT TIMELINE ACCTS
14. ACCRUED REVENUE
15. ACCRUED EXPENSE
16. ACCRUED EXPENSE
17. UNEARNED REVENUE
18. UNEARNED REVENUE
19. PREPAID EXPENSE
20. PREPAID EXPENSE
21. CLOSING ENTRIES
22. Closing Entries
Prepare the accounts for the next periods transactions.
Transfer the revenue, expense, and dividends balances to
Retained Earnings.
23. Which Accounts Need To Be Closed?
Temporary accounts are closed
Revenue
Expense
Dividends
Permanent accounts are not closed
Assets
Liabilities
Stockholders equity
24. Journalizing the Closing Entries April 30 Service Revenue
7,400 Retained Earnings 7,400 April 30 Retained Earnings 4,415 Rent
Expense 1,000 Salary Expense 1,900 Supplies Expense 300
Depreciation Expense 275 Utilities Expense 400 Income Tax Expense
540 April 30 Retained Earnings 3,200 Dividends 3,200
List assets and liabilities in order of their relative
liquidity.
Liquidity - how quickly an item can be converted to cash.
27. Classifying Assets and Liabilities Current assets Long-term
assets Current liabilities Long-term liabilities
28. Correction of posting errors
29. TYPES OF ERRORS
Error of Omission when a transaction is completely omitted from
the books
Error of Commission -when an entry has been posted to the
correct side of the Ledger but to the wrong account
Error of Principle -where a transaction has been treated
incorrectly as capital expenditure instead of revenue
expenditure
Compensating errors -where an error on the debit side is
compensated by an error of equal amount on the credit side.
Error of Original entry -a wrong amount is recorded in the
subsidiary book and posted to the accounts.
Complete Reversal Of Entries -where the correct accounts are
used but each item is shown on the wrong side of the account.
30. Suspense Account
Is created when we discovered errors before the Final Accounts
and Balance Sheet are prepared,
The account is to records the difference between the total of
the debits and the total of the credits in the Trial Balance
and
Suspense account helps to balance the Trial Balance by
temporarily putting into an account which after the errors being
found, the suspense account be adjusted and become zero/nil
balance.
31. Perpetual vs. Periodic System Balances should now be
correct Transfer Purchases balance to Cost of Goods Sold Other
procedures: Adjust Inventory balance to agree with year-end
physical count and merchandise value Adjust Inventory balance to
agree with year-end physical count and merchandise value Year-end
procedures: Merchandise cost is transferred from Inventory to Cost
of Goods Sold -an Income Statement account No adjustment to
inventory is necessary; merchandise cost is already on the Income
Statement When a sale is made: Balance Sheet Income Statement
Appears on: Inventory Purchases Account used to record inventory
purchases: Perpetual Periodic Method >>>