LESSON 18-2
Calculating Depreciation
Expense
Original created by M.C. McLaughlin, Thomson/South-Western
Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School
CENTURY 21 ACCOUNTING © Thomson/South-Western
2
Calculating Depreciation Expense
Generally accepted accounting principles require
that the cost of a plant asset be expensed over the
plant asset’s useful life
The annual expense is recorded in Depreciation
Expense & the contra asset account Accumulated
Depreciation
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2
3
STRAIGHT-LINE DEPRECIATION
 The easiest & most widely used method of depreciation is
known as the straight-line method of depreciation
 The straight-line method of depreciation charges an equal
amount of depreciation expense in each full year in which
the asset is used
 The method requires the business to know the cost of the
plant asset & to estimate two amounts:
 The amount the business expects to receive when a plant asset is
removed from use, known as the estimated salvage value
 The number of years a plant asset is expected to be used, known
as the estimated useful life
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2
4
STRAIGHT-LINE DEPRECIATION
page 538
Calculating Annual Depreciation Expense
1. Subtract the asset’s estimated salvage value from the original cost.
2. Divide the estimated total depreciation expense by the years of
estimated useful life.
–
Estimated
Salvage Value
=
Estimated Total
Depreciation
Expense
–
$250.00
=
$3,000.00
Estimated Total
Depreciation
Expense
÷
Years of Estimated
Useful Life
=
Annual
Depreciation
Expense
$3,000.00
÷
5
=
$600.00
Original
Cost
$3,250.00
CENTURY 21 ACCOUNTING © Thomson/South-Western
1
2
LESSON 18-2
5
CALCULATING DEPRECIATION EXPENSE
FOR PART OF A YEAR
A month is the smallest unit of time used to calculate
depreciation
A plant asset may be placed in service at a date other
than the first day of a fiscal period
A business may elect to calculate depreciation expense to the
nearest first of a month
A partial year’s depreciation may also be recorded in
the year the plant asset is sold or disposed of
Plant assets may continue to be used after their
estimated useful lives have ended; however, no
additional depreciation is recorded
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2
6
CALCULATING DEPRECIATION EXPENSE
page 539
FOR PART OF A YEAR
Calculating Partial Year’s Depreciation Expense
1. Divide the annual depreciation expense by 12.
2. Multiply the monthly depreciation expense by the number of
months the plant asset is used in a year.
Annual
Depreciation
Expense
÷
Months in
a Year
=
Monthly
Depreciation
Expense
$600.00
÷
12
=
$50.00
Monthly
Depreciation
Expense
×
Number of Months
Asset Is Used
=
Partial Year’s
Depreciation
Expense
$50.00
×
5
=
$250.00
CENTURY 21 ACCOUNTING © Thomson/South-Western
1
2
LESSON 18-2
7
CALCULATING ACCUMULATED
DEPRECIATION
20X2 Accumulated
Depreciation
$1,200.00
+
+
20X3
Depreciation
Expense
$600.00
page 540
=
20X3 Accumulated
Depreciation
=
$1,800.00
Depreciation is not recorded as a reduction of the plant asset
account. The amount of depreciation expense of a plant asset’s
useful life is known as accumulated depreciation
The accumulated depreciation for a plant asset is calculated
by adding the depreciation expense for the current year to the
prior year’s accumulated depreciation
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2
8
CALCULATING BOOK VALUE
page 540
Original
Cost
–
Accumulated
Depreciation
=
Ending
Book Value
$3,250.00
–
$1,800.00
=
$1,450.00
The original cost of a plant asset minus accumulated
depreciation is known as the book value of a plant asset
The book value is calculated by subtracting the accumulated
depreciation from the original cost of the plant asset
The ending book value is the beginning book value for the
next year
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2
9
CALCULATING BOOK VALUE
page 540
The book value can also be calculated by subtracting the
year’s depreciation from that year’s beginning book value
Beginning
Book Value
–
Annual
Depreciation
=
Ending
Book Value
$2,050.00
–
$600.00
=
$1,450.00
Either method of calculating a book value is acceptable
because both methods calculate the same amount
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2