Depreciation Adjusting Entries for BAF3M

1. Adjusting Entries #4
Depreciation

2. Depreciation
• What is it?
• First let’s remember our definition for an expense
• Something that we spend money on that helps to generate revenue
• Based on this definition, shouldn’t things like equipment or cars be
expenses? We use these things to generate revenue, correct? Yes
• These assets do become expenses – over time – and they offer
benefit to the business over multiple accounting periods

3. Depreciation
• However, items such as a car don’t suddenly become worthless – it
loses some of it’s value each year
• So a portion of the cost of the equipment should be allocated as an
expense in each year of the item’s life
• This process meets the matching principle

4. Depreciation
Depreciation  an allowance made for the decrease in value of an
asset over time
Depreciation is an expense so it appears on the INCOME STATEMENT

5. Depreciation
• An anecdotal example
From Accounting1 7th Edition, By Syme, Ireland, Dodds

6. Depreciation
• Calculation Methods
• 2 methods we will learn are:
• Straight Line Method
• Declining Balance Method

7. Depreciation
• Straight Line Method
• Divides up the net cost of the asset equally over the years of the asset’s life
Straight Line for 1 yr = (original cost - estimated salvage value)
Estimated # of periods in the asset’s life

8. Depreciation
Straight line Example
• Tip Top Trucking purchased a truck for $78,000 on Jan 1. 20--. The
truck could be used for 6 years, and be sold at that time for $7,800.
• Therefore:
Estimated Annual Depreciation is
($78,000 – $7,800) / 6 = $11,700
The truck will depreciate at a rate of $11,700 each year.

9. Depreciation
• Recording Depreciation
Journal
DR: Depreciation Expense – Truck* $11,700
CR: Accumulated Depreciation – Truck* $11,700
• *the name of the asset being depreciated (ie truck,
equipment, machinery. Etc)
The use of the accumulated depreciation account
provides 2 types of information:
1) By not taking the depreciation right off of the asset
account we can still find the original cost of the asset
2) We can quickly calculate the total amount of
depreciation recorded over the years

10. Depreciation
• Accumulated Depreciation is a CONTRA account
• A contra account is one that is displayed alongside an associated account and
has a balance that is opposite to that account
• The previous example of a CONTRA account that you’ve learned is HST
Recoverable
• Because Accumulated Depreciation is a Contra Asset, it has a Credit Balance

11. Depreciation
• Adjusting Entry for Depreciation
1) records the depreciation for the period in the depreciation expense
account
2)Increases the appropriate accumulated depreciation account for the
asset, which reduces the asset’s net book value
Journalized as…
Depreciation Expense - (Asset Name) $$$$
Accumulated Depreciation - (Asset Name) $$$$

12. Depreciation
Declining-balance Method
• Allocates a greater amount of depreciation to the first years of an asset’s life
• This is the method the government requires for income tax purposes
• To find the depreciated amount you take the undepreciated cost of the asset and
multiply it by a fixed %
• This % is set by the gov’t
• Most examples we will do will
be at 20% or 30%

13. Depreciation
Declining-balance Method Example
• Formula: Annual Depreciation = Undepreciated Cost * Given % Rate
• Example: Equipment bought for $24,000 will have a useful life of six years, depreciated at
a rate of 20% per year.
• The Amount of Depreciation in this method will be different each year – it will be the
biggest in the first year and get smaller (‘decline’) in each year
Year 1 = 24,000*20% = 4,800
Year 2 = (24,000-4,800)=19,200*20% = 3,840
Year 3 = (19,200-3,840)=15,360*20%= 3,072
Year 4 = (15,360-3,072)=12,288*20%=2,457.60
Year 5 = (12,288-2,457.60)=9,830.40*20%=1,966.08
Year 6 = (9,830.40-1,966.08)=7,864.32*20%=1,572.86

14. Depreciation
• Comparison of methods
Straight Line Declining Balance
Uses Salvage Value Ignores Salvage Value
Ignores the % rate Uses a given % rate
Same Depreciation Expense
amount each year
Declining Depreciation
Expense amount each year