Depreciation

Depreciation

• An allowance made for the decease in the value of an asset over time
• With the exception of land, every fixed asset is expected to be used up over the course of time
• Depreciation must be included on income statement and balance sheet
• Depreciation is estimated because you do not know exactly how long the asset will last

Depreciation Expense

• It is included on the worksheet as an adjustment
• It is a way of charging the estimated drop in value of an asset against revenue for the fiscal period

Straight Line Depreciation

• Straight Line Depreciation – divides the net cost of the asset equally over the life of the asset

Annual Depreciation for one year

= estimated cost of asset – estimated salvage value
Estimated number of periods in the life of the asset

Example 1

Tip Top Trucking purchased a truck on January 1 for $78,000.  The truck will be used for 6 years and it is estimated that it will be sold for $7,800.  Calculate the annual depreciation

Annual =    78,000 – 7,800
                             6

             =    $11,700

Example 2

TTT purchased furniture on June 1 for $5,120.  The furniture will last for 10 years and be sold for $500.  Calculate the depreciation amount that would appear on the financial statements. 

Annual =    5120-500
                         10

             =    462

• Since the furniture was purchased on June 1st, it was only used for 7 months
• To calculate the amount on the financial statements you must do the following:

462  ÷ 12 x 7 = 269.50

Adjusting For Depreciation

• Each asset that depreciates now has a contra asset (similar to HST) valuation account known as Accumulated Depreciation

Journal Entry for Example 1

Depreciation Expense – Truck               11,700
   Accumulated Depreciation – Truck                        11,700

• On the worksheet, accumulated depreciation appears below the asset and is a CREDIT account
• On the balance sheet, it is set up the same way as HST Payable and Recoverable
• There is a new Balance Sheet example for you to review
  

Declining Balance Method

• Calculates the annual depreciation by multiplying the remaining value of the asset by a fixed percentage
• The CCRA sets guidelines concerning depreciation rates on certain products
• The percentages are given to you in a link below

Example 1

On January 1st, Mr. Roy purchased a car valued at $22,000.  The CCRA states the rate for automobiles is 30%.  Calculate the depreciation value over the next three years.

Year 1 = 22,000 * 30% = 6,600
Year 2 = 15,400 * 30% = 4,620
Year 3 = 10,780 * 30% = 3,234

50% Rule

If a product is purchased in the middle of the year, and the declining balance method is used, the depreciation value is 50% of what the percentage outlines for year one then the outlined percentage for the remainder of the life of the asset