Planning & Recording Depreciation Adjustments

1. LESSON 14-5 Planning and Recording Depreciation Adjustments

2. PLANNING & RECORDING DEPRECIAITON ADJUSTMENTS • Businesses use two broad categories of assets in their operations • Cash & other assets expected to be exchanged for cash or consumed within a year are called current assets • Assets that will be used for a number of years in the operation of a business are called plant assets • Businesses may have three major types of plants assets – equipment, buildings, & land LESSON 14-5

3. PLANNING & RECORDING DEPRECIAITON ADJUSTMENTS • Plant assets decrease in value over time • A portion of a plant asset’s cost is transferred to an expense account in each fiscal period that a plan asset is used to earn revenue. • The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life is called depreciation expense. LESSON 14-5

4. PLANNING & RECORDING DEPRECIAITON ADJUSTMENTS • Three factors are considered in calculating the annual amount of depreciation expense for a plant asset: • Original cost – includes all costs paid to make the asset usable to a business. Includes the price, delivery costs, & any necessary installation costs • Estimated Salvage Value – the amount an owner expects to receive when a plant asset is removed from use is called estimated salvage value(may also be referred to as residual value or scrap value) • Estimated Useful Life – When a plant asset is bought, the exact length of useful life is not known. The number of years of useful life must be estimated LESSON 14-5

5. PLANNING & RECORDING DEPRECIAITON ADJUSTMENTS • Charging an equal amount of depreciation expense for a plant asset in each year of useful life is called the straight-line method of depreciation • To calculate the annual depreciation expense: • Subtract the asset’s estimated salvage value from the asset’s original cost. This difference is the estimated total depreciation expense for the asset’s entire useful life. • Divide the estimated total depreciation expense by the years of estimated useful life. The result is the annual depreciation expense LESSON 14-5

6. OriginalCost Estimated TotalDepreciationExpense – ÷ EstimatedSalvage Value Years ofEstimatedUseful Life = = AnnualDepreciationExpense Estimated TotalDepreciationExpense CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued on next slide) 1. Subtract the asset’s estimated salvage value from original cost. 2. Divide the estimated total depreciation expense by the years of estimated useful life. 1 $1,250.00 – $250.00 = $1,000.00 2 $1,000.00 ÷ 5 = $200.00 LESSON 14-5

7. PLANNING & RECORDING DEPRECIAITON ADJUSTMENTS • The total amount of depreciation expense that has been recorded since the purchase of a plant asset is called accumulated depreciation. • The amount accumulates each year of the plant asset’s useful life. • The original cost of a plant asset minus accumulated depreciation is called the book value of a plan asset. LESSON 14-5

8. 20X2AccumulatedDepreciation Original Cost + – 20X3DepreciationExpense AccumulatedDepreciation = = 20X3AccumulatedDepreciation EndingBook Value CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued from previous slide) $400.00 + $200.00 = $600.00 $1,250.00 – $600.00 = $650.00 LESSON 14-5

9. 3 3 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE page 425 2 1 1. Write the debit amounts. 2. Write the credit amounts. 3. Label the adjustments. LESSON 14-5

10. TERMS REVIEW page 426 • current assets • plant assets • depreciation expense • estimated salvage value • straight-line method of depreciation • accumulated depreciation • book value of a plant asset LESSON 14-5