Course 2, Intuit, Module 3,Depreciation

Depreciation

This means we realize part of the expense over time as the asset provides benefits to the business.

The most common depreciation method is called straight-line depreciation.

Straight-line depreciation

The same amount of Depreciation Expense is recorded each accounting period, during an asset’s service life.

Determining Service life

For accounting purposes, an asset’s service life may not match its item life. The service life of an asset is an estimate of the useful life of an object based on considerations like:

• How often the item will be used

• How long similar items last

Some assets return value after their service life, such as with vehicle trade-ins, while other assets may be used until they are worthless. And technology- based assets may still physically function but become obsolete with advances in industry standards.

Other depreciation methods:

There are alternatives to staright line depreciation:

Units of production

A $30000 van will last 150000 miles. If you drove it 25000 miles(1/6 of total miles) in year 1, you’d depreciate the value by 1/6 or $5000.

Accelerated depreciation

The asset is used more earlier in its life so you would depreciate more in year 2 than year 4.

A Depreciation Schedule

Is a table that shows the depreciation amount over the span of the asset’s life. For accounting & tax purposes, the depreciation expense is calculated & used to “write-off” the cost of purchasing high-value assets over time.

Disposition of Assets

The selling scrapping

Accounts payable

Accounts payable represents what the company owes to vendors and suppliers for the things it needs to run its business.

Income taxes payable

This refers to the income taxes payable to state and federal govt. On the work performed by the employees for that period.

Short term loans payable

A short term loan is the company’s formal promise to pay back a borrowed amount within 1 year.

Compensation and Benefits

This refers to the salaries & benefits payable to the employees for the work they have completed in that period.

Deferred revenues

Deferred revenues are those amounts that represents the company’s obligation to provide a future good or service to a customer who has paid in advance. Deferred revenue is also known as unearned revenue.

Few more things to remember deferred revenue

1. It should not be spent the same way as regular cash.

Notes payable

This refers to those long term liabilities that will not be payable within 1 year.

Some examples include promissory notes, as well as mortgage loans on real estate.

Deferred income taxes

The result of the disparity between income recognition & accounting methods is referred to as deferred income tax.

It represents the difference between the amount of depreciation expense on a financial statement versus the amount reported on the company’s income tax return.

Bonds payable

Bonda payable are long term debt securities issued by a company which promises to pay back the principle at some specified point in the future.