Calculating and Adjusting for Depreciation
Adjusting for Depreciation
The depreciation of a fixed asset account is two-step process:
1. Calculate the Depreciation: Calculate the periodic depreciation of the asset using
either the " Straight-Line Method" or the "Declining-Balance Method"
Straight Line Method: For an asset with a value of $3500, a disposal value of $500
and a useful life of 3 years or 36 months.
Acquired Cost - Estimated Disposal Value
Annual Depreciation = ----------------------------------------------------------Estimated Periods of Use
$3,500.00 - $500.00
Annual Depreciation = -----------------------------------------36 months
$3,000.00
Annual Depreciation = -----------------------------------------36 months
Annual Depreciation = $83.33 / month
Declining Balance Method: The following example shows the annual depreciation of
an asset with an original cost of $3000 and a depreciation rate of 20%. The percentage
values for depreciation allowed for assets using this method are shown in the textbook.
Annual Depreciation = Undepreciated Cost - (Undepreciated Cost X Capital Cost Allowance Rate)
Annual Depreciation = 3,000.00 - (3,000.00 X 20%)
Annual Depreciation = 3,000.00 - $600.00
Annual Depreciation = $2,400.00
2. Record the depreciation in the Accumulated Depreciation and the
Depreciation Expense accounts. The following example is for a piece of
equipment that we are going to claim a depreciation expense of $1000.
Date
Dec. 31
Account
Debit
Depreciation Expense
1,000.00
Accumulated Depreciation/Equipment
Credit
1,000.00
Accumulated depreciation is a “contra asset” account. The value of the fixed asset
remains the same from year to year, at the original value of the asset when purchased.
On the balance sheet, we show the value of the asset and on the next line we show
“Less: Accumulated depreciation”
Example:
Automobile
Less: Accumulated Depreciation
30,000
10,000
20,000
We show the amount of depreciation that has accumulated from year to year in the
“Accumulated Depreciation” account and claim the amount of expense claimed each
year in the “Depreciation expense” account.