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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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### 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 />