Accounting Practices
501
Chapter 9
Introduction to Depreciation
Cathy Saenger, Senior Lecturer,
Eastern Institute of Technology © Pearson 2011
Depreciation
Definition of Depreciation
The systematic allocation of the depreciable amount of
an asset over its useful life
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How do we depreciate an asset?
•
•
•
•
Identify the cost of the asset
Determine the useful life of the asset
Estimate a residual value
Choose a method of depreciation allocation (we
will use the following two methods)
Straight-line method (SL)
Diminishing value method (DV)
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Straight-line method (SL)
The depreciable cost of the asset is spread
evenly over its useful life
$50,000
5 Accounting Periods
$10,000
$10,000
$10,000
Ch9A - Intro to Depreciation
$10,000
$10,000
4
Straight-line method (SL)
The Formula :
Depreciation expense = Cost price – Residual value
Estimated useful life
Cost price includes all costs to get the fixed asset operational
(Purchase price, insurance in transit, freight, modification
costs, initial registration, installation costs, etc)
Residual value is the expected value at the end of its
estimated useful lifetime
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Diminishing Value method (DV)
• Assets are more efficient at the start of their
lives and then taper off
• The costs to keep it operational will increase
each year
• Depreciation charges are therefore higher in the
earlier years
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Diminishing Value method (DV)
The Formula :
Depreciation expense = Book value x rate(%)
Book value = Cost Price – Accumulated Depreciation
Cost price includes all costs to get the fixed asset operational
(Purchase price, insurance in transit, freight, modification
costs, initial registration, installation costs, etc)
Let’s look at an example of recording depreciation
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General Journal
Account Titles
Date
1/4/X2 Vehicle at cost
Ref no
GST Paid
Debit
16,000
Credit
2,400
Bank
18,400
Being entry required to record
purchases of vehicle
On 1 April 20X2: Purchased a vehicle for $18,400 cash
General Ledger
Date
Details
Ref no
Vehicle at cost
1/4/X2 Bank
GJ1
Dr
16,000
Ch9A - Intro to Depreciation
Cr
Balance
16,000 Dr
8
General Ledger
Date
Details
Ref no
Vehicle at cost
1/4/X2 Bank
GJ1
Dr
Cr
16,000
Balance
16,000 Dr
On 31 March 20X3: Depreciate the vehicle using the Straight-line
method, estimated residual value $1,000 and estimated useful life is
5 years
Depreciation expense (SL) = (16,000 – 1,000) / 5 years
= $3,000
Let’s look at the General Journal entry for the
depreciation amount
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General Ledger
Date
Details
Ref no
Vehicle at cost
1/4/X2 Bank
GJ1
Dr
Cr
16,000
Balance
16,000 Dr
On 31 March 20X3: Depreciate the vehicle using the Straight-line
method, estimated residual value $1,000 and estimated useful life is
5 years
Depreciation expense (SL) = (16,000 – 1,000) / 5 years
= $3,000
General Journal
Account Titles
Date
31/3/X3 Depreciation expense
Ref no
Accumulated depreciation (Vehicle)
Debit
3,000
Credit
3,000
Being entry required to record
depreciation on vehicle on SL basis
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General Ledger
Date
Details
Ref no
Vehicle at cost
6/8/X2 Bank
GJ1
Dr
Cr
16,000
Balance
16,000 Dr
On 31 March 20X3: Depreciate the vehicle using the Straight-line
method, estimated residual value $1,000 and estimated useful life is
5 years
Depreciation exp (SL) = (16,000 – 1,000)/5 years x 8 mnths
Depreciation exp (SL) = 3,000 x 8 /12
Depreciation exp (SL) = $2,000
What happens if the vehicle was purchased on
6 August 20X2?
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