# Depreciation Amortization

Document Sample

```					Depreciation

Jun 1, 2012
Depreciation (Amortization)
• An allowance made for the
decrease in value of an asset
over time.
Purpose of Depreciation
• So expenses are matched with
revenues (matching principle)
Salvage/Residual Value
• Estimate of the asset’s value at
the end of it’s useful life. (ex.
Vehicles)
Depreciation Methods
• Straight-line
• Declining-balance
• Units-of-activity
Straight-Line
• Residual value is deducted from
the cost of the asset to determine
an asset’s amortizable cost (total
amount that can be amortized)
• Amount is same for each year
OriginalCostofAsset  Re sidualValue
Depreciation 
EstimatedUsefulLife
Example

• Suppose a Truck purchased
Jan 1st costs \$20,000 has a
useful life of 5 years and a
residual value of \$5000.
Depreciation Amount
• Depreciation = \$20,000-\$5,000
5years
=15,000 = 3000
5

The Truck depreciates \$3000/year
Straight-Line

Accumulated
Year Depreciation Depreciation BookValue
0        0            0         20000
1      3000         3000        17000
2      3000         6000        14000
3      3000         9000        11000
4      3000         12000        8000
5      3000         15000        5000
Accounts involved:
• Accumulated Depreciation - Truck
• Depreciation Expense – Truck
Why use the accumulated
depreciation account instead of
just crediting truck?
Allows us to see more
information.
Declining-balance method
• Produces a decreasing annual
amortization expense over the
asset’s useful life.
• Amortization is determined as a
percentage of the book value.

• Amortization = rate(%) x Book
value(\$)
When to use it?
• When asset is more useful earlier
on (Follows matching principle)
• When asset losses usefulness
quickly (Sometimes items
become obsolete quickly)
Example
• Suppose a vehicle costs \$100,000, which
was purchased Jan 1, 2012 and declines
at a rate of 30% per year.
• Calculate the amortization and book value
at the end of 2012 as well as 2013
2012
• Amortization
= 100,000*30%
=\$30,000

New Book Value
=100,000-30,000
=\$70,000
2013
• Amortization
= 70,000*30%
=\$21,000

New Book Value
=70,000-21,000
=49,000
Remark
• After only two years,   120000

the vehicle is worth    100000

have of its original    80000

book value.
Year
60000
BookValue

40000

20000

0
1   2   3   4   5   6

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 3 posted: 10/30/2012 language: English pages: 20