# Intro to Depreciation by xiaoyounan

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VCE ACCOUNTING UNIT 3

DEPRECIATION
Ref: Chpt 11

Definitions:

Asset

Expenses

The key difference between an asset and an expense is

Depreciable asset (page 208)

Finite life (page 208)

Depreciable assets will be ____________________ over time. A consumption of an economic benefit is an
______________________

GST & Depreciation (page 209)

GST is excluded from the calculation of depreciation because
Depreciation of non-current assets

Depreciation (page 209)

Depreciation Expense (page 209)

Purpose of Depreciation (page 209)

Accounting Principles & Characteristics and the Balance Day Adjustment for Depreciation

Accounting Principle: Reporting Period (page 209)

Accounting Characteristic: Relevance (page 209)

Depreciation & Accounting Reports (page 209 & page 215)

Depreciation does not involve any payment of ______________. The _________________________ relating
to each non-current asset will be recorded _____________________________________________________

Accumulated depreciation (page 212)

Carrying Value (page 216)

Accounting Report         Depreciation related Item/s & explanation
Cash Flow Statement

Profit & Loss Report

Balance Sheet
Calculation of Depreciation Expense: (page 210)

Straight line method assumes

Historical Cost (HC)

Residual Value (RV)

Life

Straight Line Method:
Formula:

Depreciable value (page 211)

The Rate of Depreciation (page 216)

The formula used so far calculates the ______________ of depreciation expense, expressed in ___________
but depreciation can also be expressed as a _____________ ie a __________________ of the ___________
Using the formula or the rate to calculate depreciation expense will produce exactly the same answer; the
choice of method depends only on the _______________________ available.

Depreciation rate:
Formula:

Complete the example on the worksheet
Recording for Depreciation

Example
On January 1, 2010 Mixwell Paints purchased a new van for \$32,000 (plus \$3,200 GST). It is expected to
have a useful life of 5 years and a scrap value of \$10,000. Straight line depreciation will be used.

1. Calculate the annual depreciation expense amount.

2. Record the journal entries necessary to make the adjustment for depreciation expense on December
31, 2010 (Memo 10).
General Journal
Date Details                                                     General Ledger      Subsidiary Ledger
Debit      Credit       Debit       Credit

3. Post the adjusting entries from the General Journal to the General Ledger accounts.

Depreciation of Van (expense)
Date    Cross Reference                       \$       Date     Cross Reference                      \$
Accumulated Depreciation of Van (-ve Asset)
Date    Cross Reference                     \$      Date      Cross Reference                         \$

4. Record the closing entry in the General Journal above and post to the General Ledger. Balance the
remaining account.

5. Complete the extract from the Balance Sheet to show the details for the van as at December 31, 2010

Balance Sheet (extract) as at December 31, 2010
Non-Current Assets

6. What is the carrying value of the van as at December 31, 2010?

7. How would the depreciation expense be reported?

8. Prepare the General Journal entry to show the adjusting and closing entries for depreciation on
December 31, 2011. Post these to the General Ledger.

9. Show how the extract from the Balance Sheet would appear as at December 31, 2011.

Balance Sheet (extract) as at December 31, 2011
Non-Current Assets

10. Show how the adjusting entry made on December 31, 2011 would effect the Accounting Equation.

Item          Increase/Decrease/No effect                                              Amount

Complete Exercises 11.1, 11.2, 11.3, 11.4 & 11.5
Cost of a Non-Current Asset (page 218)

Definition:

The cost of a NCA may therefore include:





Remember to distinguish between those items which have a benefit beyond the reporting period (and are
therefore part of the cost of the NCA) and those items where the benefit is used up/consumed in the
reporting period (and are therefore treated as expenses)

Example:
On March 1, 2010, Danny’s Donuts paid \$26,000 (plus \$2,600 GST) to purchase a new oven (Ch 32). The
payment covered the following costs:
Supplier’s price for the oven                                    \$22,000
Installation costs                                                 3,000
Maintenance fee                                                    1,000 per year
GST                                                                2,600
Total Paid                                                       \$28,600

Required:
1. Show how the purchase of the oven on March 1 would be recorded in the Cash Payments Journal
2. Post the Cash Payments Journal entries relating to the purchase of the oven to the General Ledger
accounts.
3. Calculate the depreciable cost of the oven.

Calculation of depreciable cost of the oven

4. How would the Maintenance Fee be reported on April 31, 2011? Why?
Cash Payments Journal
Date    Details                         Chq     Bank      Discount    Creditors   Wages    Drawings   GST   Sundries
No                Revenue

Totals                                                 400      4,500 19,000         3,300

General Ledger

Bank
Date               Cross Reference                \$            Date               Cross Reference              \$
Mar 1    Balance                                  2,700
31    Cash Receipts                           83,000

Oven
Date               Cross Reference                \$            Date               Cross Reference              \$

Prepaid Maintenance Fee
Date               Cross Reference                \$            Date               Cross Reference              \$

GST Clearing
Date               Cross Reference                \$         Date                  Cross Reference              \$
Mar 1    Creditors Control                             700 Mar 1        Balance                                    800
31      Bank                                   1,600
Debtors Control                        1,300

Complete Exercise 11.6

Depreciating a Non-Current Asset for less than a year (page 220)

If a firm has control of an asset for less than a year, the depreciation figure will need to be applied on a
_______________________________

Complete Exercises 11.7, 11. 8 & 11.9
Use of Estimates in Calculating Depreciation (page 221)

To calculate depreciation we need to __________________ the asset’s __________________________ and
________________________.
Because we use these estimates in the calculation of depreciation, reports will not be __________________
and this will undermine the _____________________ of accounting reports.
In this case, the Qualitative Characteristic of ___________________ overrides the characteristic of
____________________ so that accounting reports fulfil their function of providing
_____________________________________.
Depreciation ensures that the Profit & Loss Statement includes all the information that is
________________ for _____________________ by showing the consumption of non-current assets in the
current ________________________. By showing _____________________________ in the Balance Sheet,
it ensures that assets are shown at their _________________________, which is vital for