VCE Accounting

1. 13.5
RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS

2. © Michael Allison. Author’s permission required for external use.
 Income Statement – listed as an Other Expense
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS
Income Statement for the month ended 30 June 2015
$ $
Revenue
Cash sales 15000
Credit sales 7000 22000
less Cost of Goods Sold
Cost of sales 13000
Cartage inwards 1000 14000
Gross Profit 8000
less Stock loss 500
Adjusted Gross Profit 7500
less Other Expenses
Depreciation – Vehicle 2000
Wages 3000 5000
Net Profit 2500
Income Statement for the month ended 30 June 2015
$ $
Revenue
Cash sales 15000
Credit sales 7000 22000
less Cost of Goods Sold
Cost of sales 13000
Cartage inwards 1000 14000
Gross Profit 8000
less Stock loss 500
Adjusted Gross Profit 7500
less Other Expenses
Depreciation – Vehicle 2000
Wages 3000 5000
Net Profit 2500

3. © Michael Allison. Author’s permission required for external use.
 Balance Sheet – listed under Non-Current Assets showing:
 Historical cost: the original “cost” of the asset
 Accumulated depreciation: the total amount of depreciation charged
(economic benefits consumed) during the life of the asset so far
 Carrying value: the historical cost less the accumulated depreciation
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 1000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 10000
Accumulated depreciation 2000 4000 6000 8000 1000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 10000
Accumulated depreciation 2000 4000 6000 8000 10000
Carrying value 8000 6000 4000 2000 0
Balance Sheet (Extract) as at
$ $ $ $ $
Non-Current Assets
Vehicle 10000 10000 10000 10000 10000
Accumulated depreciation 2000 4000 6000 8000 10000
Carrying value 8000 6000 4000 2000 0
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS
The purchase (invoice) price of the asset – or its agreed value
• Any costs required to get it in a capacity and location to earn revenue
• Which will provide an economic benefit for the life of the asset

4. © Michael Allison. Author’s permission required for external use.
 What is the carrying value of a non-current asset? Represents…
8,000
6,000
4,000
2,000
-
2,000
4,000
6,000
8,000
10,000
Year 1 Year 2 Year 3 Year 4 Year 5
Carrying Value (Unused) Accumulated Depreciation (Used)
Accumulated Depreciation
• The used part of the asset
Carrying Value
• The unused part of the
asset
• The future economic
benefits the asset will
provide
• The amount the asset is
being “carried” at on the
Balance Sheet
Accumulated Depreciation
• The used part of the asset
Carrying Value
• The unused part of the
asset
• The future economic
benefits the asset will
provide
• The amount the asset is
being “carried” at on the
Balance Sheet
Accumulated Depreciation
• The used part of the asset
Carrying Value
• The unused part of the
asset
• The future economic
benefits the asset will
provide
• The amount the asset is
being “carried” at on the
Balance Sheet
Accumulated Depreciation
• The used part of the asset
Carrying Value
• The unused part of the
asset
• The future economic
benefits the asset will
provide
• The amount the asset is
being “carried” at on the
Balance Sheet
Accumulated Depreciation
• The used part of the asset
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS

5. © Michael Allison. Author’s permission required for external use.
 Example: a vehicle was purchased on 1 January 2015…
 Cost = $15,000
 Estimated useful life = 3 years
 Estimated residual value = $3,000
0 1 2 3
Cost
$15,000
$4,000 $4,000 $4,000
Carrying
Value
$11,000
Carrying
Value
$7,000
Carrying
Value
$3,000
Depreciation expense =
ResidualCost -
Useful Life
= $4,000
$15,000 $3,000
3
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000
Balance Sheet (Extract) as at
Year 1 Year 2 Year 3
Non-Current Assets
Vehicle 15000 15000 15000
Accumulated depreciation 4000 8000 12000
Carrying value 11000 7000 3000

6. © Michael Allison. Author’s permission required for external use.
 Why is the Residual Value is subtracted when calculating depreciation?
E.g. a vehicle was purchased on 1 January 2015…
 Cost = $15,000
 Estimated useful life = 3 years
 Estimated residual value = $3,000
Depreciation expense =
ResidualCost -
Useful Life
= $4,000
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS

7. © Michael Allison. Author’s permission required for external use.
300015000 -
Depreciation expense =
3
= $4,000
Asset’s Total Cost
$15,000
Depreciable amount – the amount of the asset’s total cost
that will be depreciated…
$0 $3,000
Residual
Value
Depreciable Amount
13.5 RECORDING DEPRECIATION
IN THE FINANCIAL REPORTS
The asset’s
economic benefits
that will be
used/consumed
The asset’s
economic benefits
that will NOT be
used/consumed
The Residual Value of $3,000 represents:
• The amount that will remain unused of the asset
• The business will never use these economic benefits
• Hence, it can’t deduct them as an expense

8. © Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
SQ8 X
SQ10 X
Ex13.2 X
Ex13.3 X