Lesson: 30

Topic: Adjusting for Depreciation

Objectives:

By the end of this class, the student should understand the process involved in adjusting any variety of fixed assets to account for the effects of depreciation.

Students will learn to record these adjusting entries in both the General Journal and the General Ledger.

In addition, students will learn to differentiate between:

• the "straight-line" and the "declining-balance" methods of depreciation,
• the "Accumulated Depreciation" and the "Depreciation Expense" accounts, and
• the "Acquired Cost" and the "Net Book Value" of an asset.

Because the value of fixed assets continually decreases with time, they must be adjusted at the end of the fiscal period. The value of these fixed assets after the adjustment for depreciation has been made is known as the "Net Book Value."

Adjusting these fixed asset accounts allows us to plainly observe the negative effect which time has had on their value. You can well imagine that if we did not adjust these accounts, their balances would present an inaccurate perception of their value.

Adjusting for Depreciation - the Process

The depreciation of a fixed asset account is a fundamentally a two-step process:

1. Calculating the Depreciation: Calculate the periodic depreciation of the asset using either the "Straight-Line Method" or the "Declining-Balance Method"

Straight Line Method:

	Acquired Cost - Estimated Disposal Value
Annual Depreciation =	-----------------------------------------------------------
	Estimated Periods of Use

	$3,500.00 - $500.00
Annual Depreciation =	------------------------------------------
	36 months

	$3,000.00
Annual Depreciation =	------------------------------------------
	36 months

Annual Depreciation =

$83.33 / month

Declining Balance Method:

Annual Depreciation = Undepreciated Cost - (Undepreciated Cost X Capital Cost Allowance Rate)

Annual Depreciation = 3,000.00 - (3,000.00 X 20%)

Annual Depreciation = 3,000.00 - $600.00

Annual Depreciation = $2,400.00

Record this first year's depreciation in the Accumulated Depreciation and the Depreciation Expense accounts .

Date	Account	Debit	Credit
Dec. 31	Depreciation Expense	1,000.00
	Accumulated Depreciation/Equipment		1,000.00

Method of Instruction and Evaluation:

After a Socratic lecture on the above topic, students will complete Exercise #6, on page 351 of the course text. (Please note the 50% rule on page #346 [under Taxation Regulations])

Expectations Addressed:

The "Fundamental Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Introduction to Accounting as a Discipline:

  • explain the purpose of accounting;

  • explain the difference between accounting and bookkeeping;

  • identify the users and uses of accounting;

  • identify the Generally Accepted Accounting Principles (GAAP) and explain their importance.
• Business Structures:
  • describe the characteristics of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • describe the advantages and disadvantages of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • explain the differences among the equity sections of different forms of business organization, including sole proprietorship, partnership, and corporation (e.g., capital account in a sole proprietorship versus common stock in shareholders’ equity in a corporation).
• The Accounting Cycle for a Service Business:
  • assess the effects that transactions have on the accounts and financial statements of a service business;
  • record transactions using the journals and ledgers of a service business;
  • prepare a trial balance and the financial statements for a service business;
  • record adjusting and closing entries for a service business (e.g., prepaid expenses, amortization, accruals);
  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a service business;
  • apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business.

Reference:

Text: chapter #9, pages 336 - 348.