Depreciation . . . key terms • Depreciation: the process of systematically allocating the cost of an asset over its useful life . • Salvage value: The estimated value of an asset at the end of its useful life • Depreciable cost: an asset’s acquisition cost less its salvage value • Book value: an asset’s cost less its accumulated depreciation • Three factors to consider when computing depreciation: cost, estimated useful life, and salvage value
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Depreciation . . . key terms• Depreciation:
the process of systematically allocating the cost of an asset over its useful life.
• Salvage value:
The estimated value of an asset at the end of its useful life
• Depreciable cost:
an asset’s acquisition cost less its salvage value• Book value:
an asset’s cost less its accumulated depreciation• Three factors to consider when computing
depreciation:
cost, estimated useful life, and salvage value
Fixed Assets
• Fixed assets are those assets:–that have a long life,–are used in the business for future generation
of income,–are not bought with the main purpose of resale.–Fixed assets are also called “Depreciable
Assets”
• No depreciation is charged on land.
Grouping of Fixed Assets
• Major groups of Fixed Assets:–Land–Building–Plant and Machinery–Furniture and Fixtures–Office Equipment–Vehicles
Recording• Depreciation
• Two different accounts are used–Depreciation Expense Account–Accumulated Depreciation Account
• Accumulated Depreciation Account – over the years the periodic depreciation is accumulated in this account.
• Debit Depreciation Expense Account
Credit Accumulated Account
Introduction to Long-Lived Assets
Plant Assets
Property, Plant, and Equipment
Expected to Benefit Future Periods
Actively Used in Operations
Tangible
Plant Assets
Issues Related to Plant Assets
Asset Service Potential
Acquisition DisposalUse in business operations
Time
Decline in future service benefits. Book Value
Accounting Issues
Measuring Cost
Recording Disposals
Allocating initial cost and subsequent
maintenance/repairs.
Acquisitioncost
Acquisition cost excludes financing charges and
cash discounts.
All expenditures
needed to prepare the asset for its intended use
Purchaseprice
Cost of Plant Assets
Land is not depreciable
Purchaseprice
Real estatecommissions
Title insurance premiumsDelinquent
taxes
Surveyingfees
Title search and transfer fees
Land
Purchaseprice
Architecturalfees
Cost ofpermits
Excavation andconstruction costs
Installationcosts
Transportationcosts
Buildings and Equipment
Depreciation – The Concept
A Theoretical View of Depreciation
$2; $3; $4; SV
$3; $4; SV
$4; SV
SV$1; $2; $3; $4;
SV
An application of the Matching Principle.
Time
Consumed as Depreciation Expense
Depreciation is a cost allocation process that systematically and rationally matches
acquisition costs of plant assets with periods benefited by their use.
Cost
Allocation
AcquisitionCost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Depreciation
Income
StatementDepreciation
ExpenseDepreciation for
the current year
Balance
SheetAccumulatedDepreciation
Total depreciation to
date of balance sheet
Depreciation
Factors in Computing Depreciation
• The calculation of depreciation requires three amounts for each asset:
• Cost.
• Salvage Value.
• Useful Life.
Depreciation Methods
• Straight-line
• Units-of-production
• Declining balance
• Sum-of-the-Years’ Digits
Depreciation• If an asset is expected to benefit all
periods equally,
– a straight-line method of depreciation would be appropriate.
Depreciation• If more benefits are expected early in
the life of an asset . . .
– an accelerated method of depreciation would be appropriate.
Depreciation• If benefits are related to the output of
an asset . . .
– the units-of-production method of depreciation would be appropriate.
• Appropriate if an asset is expected to benefit all periods equally.
• On December 31, 2001, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000.