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Depreciation<br />
What is depreciation?<br />
Non-current assets<br />Vehicles, computers, equipment, shop fittings etc (are controlled by the business) and provide fut...
But.......<br />They do not last forever, as they <br />age<br />wear out <br />lose value over time and <br />their abili...
Every year....<br />Part of the value of the non-current asset is consumed over time<br />Therfore the annual consumption ...
On 1st July 2014, Woodrow Farm purchased a computer for $3,000 (plus $300 gst)  cash. It will be kept for 3 years and esti...
Computer has life of 3 years. Why?<br />the value of the computer consumed should be  written off each year as an expense ...
Purpose<br />Ensure that an accurate (reliable) profit is determined by calculating the expense that is inccurred  in the ...
How to calculate depreciation?<br /> The formula:-<br />Historical cost less scrap value<br /> 		Useful Life<br />Deprecia...
The ledger accounts affected<br />Depreciation – shows the annual expense (debit entry)<br />Accumulated depreciation – di...
How it would look in the first 12 months?<br />Depreciation<br />1 Jul 15<br />$1000<br />Accumulated Depreciation<br />Ac...
Reporting time:- -close revenue and expense accounts,- balance assets, liabilities<br />Depreciation (expense)<br />$1000<...
After three years, the ledgers would look like.....<br />Depreciation of Computer<br />30 Jun 15<br />Acc Dep computer<br ...
The Balance Sheet<br />Year 1<br />Non current assets<br />Computer					$3000 <br />Less accumulated depreciation		$1000  ...
The Balance Sheet<br />Year 2<br />Non current assets<br />Computer					$3000 <br />Less accumulated depreciation		$1000  ...
The Balance Sheet<br />Year 3<br />Non current assets<br />Computer					$3000 <br />Less accumulated depreciation		$3000  ...
Impact on Owners’ Equity<br />Depreciation expense reduces profit therefore decrease Oe<br />Depreciation reduces the valu...
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Depreciation

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A demonstration, for VCE students in Victoria Australia, as to the nature and treatment of depreciation in basic accounting.

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Transcript of "Depreciation"

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