Depreciation

DepreciationWhat is depreciation?

Non-current assetsVehicles, 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

agewear 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 timeTherfore the annual consumption becomes an expenseDepreciation 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 months.Computer has life of 3 years. Why?the value of the computer consumed should be written off each year as an expense called depreciationthe unconsumed portion is reported as a non current asset

Depreciation - the allocation of the cost of a non-current asset over its useful life.PurposeEnsure 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 LifeDepreciation of the computer would be:$3000 less $03$1,000 per year

The ledger accounts affectedDepreciation 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?DepreciationAccumulated Depreciation1 Jul 15$1000Depreciation$1000Accumulated Depreciation1 Jul 15Reporting time:- - close revenue and expense accounts,- balance assets, liabilitiesDepreciation (expense)Accumulated Depreciation ( asset)1 Jul 15$1000Depreciation$1000Accumulated Depreciation1 Jul 15P and L Summary30 Jun 16$1000After three years, the ledgers would look like.....Depreciation of ComputerAccumulated Depreciation of Computer30 Jun 15$1000Dep of computer$1000Acc Dep computer1 Jul 15$1000Acc Depn computerP and L Summary30 Jun 16$1000$1000$1000$1000$30001 Jul 16$1000$3000$1000Dep of computerDep of computer1 Jul 17Acc Depn computerP and L SummaryP and L Summary30 Jun 1630 Jun 1730 Jun 1730 Jun 161 Jul 17Balance$30001 Jul 18Balance$3000The Balance SheetYear 1

Non current assetsComputer$3000 Less accumulated depreciation$1000 $2000

Historical costCarrying valueThe Balance SheetYear 2

Non current assetsComputer$3000 Less accumulated depreciation$1000 $2000

Historical costCarrying valueThe Balance SheetYear 3

Non current assetsComputer$3000 Less accumulated depreciation$3000 $0

Historical costCarrying valueImpact on Owners EquityDepreciation expense reduces profit therefore decrease Oe

Depreciation reduces the value of the asset therefore accumulated depreciation shows this.