Presented by:

Ayan Saeed

Sec K

Understanding the Understanding the Methods of Booking Capital Methods of Booking Capital

EquipmentEquipment

Depreciation

Based on the accounting principle that assets lose value as they age

Purpose Purpose

To match the expense associated with the item with the revenue that is generated from it

The cost for capital equipment needs to be spread over multiple years using

depreciation

Useful Lives

For each item that is above a threshold set by the company, a determination is made on how long the building or equipment will be of use to the

company

If that “useful life” is greater than one year, it is expected that the company will depreciate the item

The item is then classified as a capital assetcapital asset, and placed in the long term assets section of the

balance sheet of the company

Salvage Value

The estimated value of an asset at the end of its useful life

This estimate must be done before the depreciation of the item

Example: if an asset is acquired for $10,000, but it is expected that the item can be sold or has a scrap value

of $1,000, the amount to be depreciated is $9,000

Straight Line Method of Straight Line Method of DepreciationDepreciation

The same amount of depreciation is allocated to each year of The same amount of depreciation is allocated to each year of the asset’s useful lifethe asset’s useful life

Example: If an asset is acquired of $10,000, its scrap value is Example: If an asset is acquired of $10,000, its scrap value is $1000, and the useful life is 10 years, $900 would be $1000, and the useful life is 10 years, $900 would be

allocated to each year as Depreciation ($9,000 depreciable allocated to each year as Depreciation ($9,000 depreciable value divided by 10 years)value divided by 10 years)

This easy method assumes that the asset loses its value as This easy method assumes that the asset loses its value as time goes bytime goes by

Assets are not revalued, and gains and losses on the asset Assets are not revalued, and gains and losses on the asset are not recognized until the asset is sold or scrappedare not recognized until the asset is sold or scrapped

Accelerated Depreciation

In reality, building and equipment do not lose value in a straight line. Most commonly, items have a greater

loss of value in the first years of use

Accountants that use accelerated depreciation record more depreciation in the early years of an asset’s

useful life

Some methods accelerated depreciation: double declining balance and sum of the years digits

Accounting for Accounting for DepreciationDepreciation

On the books of the company, the value of a capital asset does not change over time. A separate line on the balance sheet is created

associated with the asset called ‘accumulated depreciation’.

Entry for the first year of the exampleDebit Equipment $10,000

Credit Cash $10,000

Depreciation Expense $900

Accumulated Depreciation $900

After the end of first year, by combining the accounts above, the accountant can determine that the undepreciated value, or net book value of the asset is

$9,100