CHAPTER 9 Depreciation of Fixed Assets CAPITAL ASSETS

  • Slides: 13
Download presentation
CHAPTER 9 Depreciation of Fixed Assets

CHAPTER 9 Depreciation of Fixed Assets

CAPITAL ASSETS l l l Fixed/Capital assets are long-lived assets that are used in

CAPITAL ASSETS l l l Fixed/Capital assets are long-lived assets that are used in the operations of a business and are not intended for sale to customers. Capital assets are recorded at cost in accordance with the cost principle. Cost consists of all the list price plus tax if applicable

Depreciation/Amortization l l Depreciation is the process of allocating to an expense account the

Depreciation/Amortization l l Depreciation is the process of allocating to an expense account the cost of a capital asset over its useful (service) life in a rational and systematic manner. Cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle. During an asset’s life, its usefulness may decline because of wear and tear or obsolescence. Land is the only capital asset that is not amortized.

Illustration 10 -6 FACTORS IN CALCULATING depreciation

Illustration 10 -6 FACTORS IN CALCULATING depreciation

DEPRECIATION METHODS Three methods of recognizing amortization are: 1. Straight-line, 2. Units of activity,

DEPRECIATION METHODS Three methods of recognizing amortization are: 1. Straight-line, 2. Units of activity, and 3. Declining-balance. Each method is acceptable under generally accepted accounting principles. Management selects the method that is appropriate for their company. Once a method is chosen, it should be applied consistently.

STRAIGHT-LINE METHOD

STRAIGHT-LINE METHOD

STRAIGHT-LINE METHOD l depreciation is constant for each year of the asset's useful life

STRAIGHT-LINE METHOD l depreciation is constant for each year of the asset's useful life

DECLINING-BALANCE METHOD l The calculation of periodic depreciation is based on a declining net

DECLINING-BALANCE METHOD l The calculation of periodic depreciation is based on a declining net book value (cost less accumulated depreciation) of the asset. l The depreciation rate remains constant from year to year, but the net book value to which the rate is applied declines each year. Net Book Value (at beginning of year) Revenue Canada’s Rate (p 345) Depreciation Expense

Diminishing-Balance Method l l Depreciation expense based on asset’s diminishing carrying amount (cost less

Diminishing-Balance Method l l Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation) Depreciation rate remains constant, but depreciation expense declines each year 9

DECLINING-BALANCE METHOD l Accelerated methods result in more depreciation in early years and less

DECLINING-BALANCE METHOD l Accelerated methods result in more depreciation in early years and less in later years

UNITS-OF-ACTIVITY METHOD To use the units-of-activity method, 1) the total units of activity for

UNITS-OF-ACTIVITY METHOD To use the units-of-activity method, 1) the total units of activity for the entire useful life are estimated, 2) the amount is divided into amortizable cost to calculate the amortization cost per unit, and 3) the amortization cost per unit is then applied to the units of activity during the year to calculate the annual amortization. Amortized Cost Amortizable Cost per Unit Total Units of Activity during the Year Amortizable Cost per Unit Amortization Expense

Units-of-Production Method l l Useful life expressed as total units of production or activity

Units-of-Production Method l l Useful life expressed as total units of production or activity Must estimate the total units of production that will be obtained from asset 12

UNITS-OF-ACTIVITY METHOD l Useful life is expressed in terms of total units of production

UNITS-OF-ACTIVITY METHOD l Useful life is expressed in terms of total units of production or activity expected from the asset

Chapter 10 Capital Assets CAPITAL ASSETS Capital assetsChapter 10 Capital Assets CAPITAL ASSETS Capital assets
Depreciation and Income Taxes Asset Depreciation Book DepreciationDepreciation and Income Taxes Asset Depreciation Book Depreciation
Closing Depreciation Concept Closing Depreciation Closing Depreciation StepClosing Depreciation Concept Closing Depreciation Closing Depreciation Step
DEPRECIATION 1 DEPRECIATION CONCEPT AND DEFINITION OF DEPRECIATIONDEPRECIATION 1 DEPRECIATION CONCEPT AND DEFINITION OF DEPRECIATION
DEPRECIATION Only on Fixed Assets Cost capital expenditureDEPRECIATION Only on Fixed Assets Cost capital expenditure
Financial Accounting Lecture 17 Fixed Assets Fixed assetsFinancial Accounting Lecture 17 Fixed Assets Fixed assets
Session 18 FIXED ASSETS Fixed Assets Types ofSession 18 FIXED ASSETS Fixed Assets Types of
Fixed Assets East Carolina University ECU Fixed AssetsFixed Assets East Carolina University ECU Fixed Assets
Depreciation The depreciation expense used for capital budgetingDepreciation The depreciation expense used for capital budgeting
CHAPTER 5 Fixed assets and depreciation Contents IntroductionCHAPTER 5 Fixed assets and depreciation Contents Introduction
Chapter 20 Depreciation of Fixed Assets Nature andChapter 20 Depreciation of Fixed Assets Nature and
Accounting for Fixed Assets and Depreciation Chapter 9Accounting for Fixed Assets and Depreciation Chapter 9