Adjusting Entry - Depreciation

(Property, Plant, and Equipment)

Depreciation

• It is the systematic and rational allocation of the depreciable cost of fixed asset over its
estimated useful life. It is the portion of the depreciable cost of the fixed asset that has been
charged to expense for the current accounting period only.

Accumulated Depreciation

• e total cost of fixed asset that has been charged to expense from its date of acquisition to the
current accounting period

Depreciable Cost

• e portion of original cost that is subject to depreciation. e amount is obtained by

deducting the residual value from the original cost.

Residual Value

• e remaining cost of fixed asset at the end of its estimated useful life. It is also the estimated
amount at which a fixed asset can be sold at the end of its estimated useful life. Other names
are salvage value and scrap value.

Carrying Value

• e difference between the original cost and accumulated depreciation.

Fixed Assets

• Tangible assets that are used in business and benefit future periods.

Fractional Depreciation

• is is the amount of depreciation that is less than one year. is is recorded when the fixed
asset is acquired aer the start of an accounting period.

Inadequacy

• A condition when a fixed asset is unable to cope with the expanded volume of operations.

Obsolescence

• A condition when a fixed asset is rendered worthless because of the introduction of a new and
superior brand or model of similar asset or due to advance in technology.
Pro-Forma Adjusting Entry:

Depreciation xxx

Accumulated Depreciation xxx

Straight-Line Method - the simplest method of computing the depreciation of a fixed asset whereby
the amount of annual depreciation is equal throughout the life of the fixed asset.

e formula is

Acquisition Cost less Salvage Value

Estimated Useful Life

Notes:

1. Depreciation as an adjusting entry is the application of the matching principle.

2. Not all tangible fixed assets are subject to depreciation. Land is not subject to depreciation.

3. Firms are not required by GAAPs to provide salvage values to their fixed assets.

4. e salvage value of a fully depreciated fixed asset is also its carrying value.

5. When a fully depreciated fixed asset does not have salvage value, its carrying amount is zero.

6. Failure to prepare an adjusting entry for depreciation will overstate the net income, total assets,
total owner’s equity.

7. Failure to prepare an adjusting entry for depreciation will understate net loss and expenses.