Depreciation

What is depreciation?

Non-current assets
Vehicles, computers, equipment, shop
fittings etc (are controlled by the
business) and provide future
economic benefit for the business for
more than 12 months.

But.......
They do not last forever, as they

age
wear out
lose value over time and
their ability to earn
revenue.

Every year....
Part of the value of the non-current
asset is consumed over time
Therfore the annual consumption
becomes an expense
Depreciation calculates this annual
consumption (expense)

On 1st July 2014, Woodrow Farm purchased a

computer for $3,000 (plus $300 gst) cash. It
will be kept for 3 years and estimated it is
worth $0 after 3 years

Non current asset:- a future

economic benefit to the farm,
controlled by the farm and will
benefit the farm for more than 12

Computer has life of 3 years.

Why?
the value of the computer consumed
should be written off each year as
an expense called depreciation
the unconsumed portion is reported
as a non current asset
Depreciation - the allocation of the
cost of a non-current asset over its
useful life.

Purpose

Ensure that an accurate (reliable)

profit is determined by calculating
the expense that is inccurred in the
current reporting period.

How to calculate
depreciation?
The formula:Historical cost less scrap value
Useful Life
Depreciation of the computer would
be:
$3000 less $0
3
$1,000 per year

The ledger accounts

affected
Depreciation shows the annual
expense (debit entry)
Accumulated depreciation displays
the reduction in the value of the
computer ie a
in asset (credit entry)

How it would look in the first 12

months?
Depreciation
1 Jul 15 Accumulate
d
Depreciatio
n

$1000

Accumulated Depreciation
1 Jul 15 Depreciatio
n

$1000

Reporting time:- close revenue and expense accounts,

- balance assets, liabilities

Depreciation
(expense)
1 Jul 15 Accumulate
d
Depreciatio
n

$1000 30 Jun 16P and L

Summary

Accumulated Depreciation (
asset)
1 Jul 15 Depreciatio
n

$1000

$1000

After three years, the ledgers would

look like.....
Depreciation of Computer
30 Jun 15 Acc Dep
30 Jun 16P and L
$1000
computer
Summary
30 Jun 16 P and L
30 Jun 16 Acc Depn computer
$1000
Summary
30
Jun
17
P and L
$1000
30 Jun 17 Acc Depn
Summary
computer

$1000
$1000
$1000

Accumulated Depreciation of Computer

1 Jul
17

Balan
ce

$3000

$3000

1 Jul 15 Dep of
computer
1 Jul
Dep of

$1000
$1000

16
1 Jul 17 computer
Dep of
computer

$1000

1 Jul
18

Balan
ce

$3000
$3000

The Balance Sheet

Year 1
Non current assets
Computer
$3000
Less accumulated depreciation
$2000
Carrying
value

Historical
cost

$1000

The Balance Sheet

Year 2
Non current assets
Computer
$3000
Less accumulated depreciation
$2000
Carrying
value

Historical
cost

$1000

The Balance Sheet

Year 3
Historical
cost

Non current assets

Computer
$3000
Less accumulated depreciation
$0
Carrying
value

$3000

Impact on Owners Equity

Depreciation expense reduces profit
therefore decrease Oe
Depreciation reduces the value of the
asset therefore accumulated
depreciation shows this.