Depreciation Notes

Depreciation

What is Depreciation?

  • Depreciation is the allocation of the cost of a non-current asset over its effective working life.

  • Over time, depreciable assets (e.g., vehicles) lose their ability to work efficiently, reducing their revenue-earning capacity.

  • Example: A computer slows down and requires more maintenance as it gets older.

  • "Allocation" means distributing the cost of an asset over its useful life.

The Purpose of Depreciation

  • The purpose of depreciation is to allocate the expense, which is the difference between the original cost of the asset and the amount it is likely to achieve (sell for) at the end of its useful life.

  • Depreciation is an important expense and is considered under accrual accounting when determining profit for a period.

  • This process usually takes several years because only a portion of the cost is allocated during each year of the asset's life.

  • Depreciation does not involve an outflow of cash.

Relevant Accounting Assumptions and Qualitative Characteristics

  • Period Assumption: Revenue earned for a period is matched against the expenses incurred in the same period to determine an accurate profit. Depreciation is reported periodically, allocating a portion of the asset's cost against the revenue it helped to earn.

  • Faithful Representation: Information presented about a non-current asset should be complete and without bias. Ignoring the fact that non-current assets lose value over time would breach faithful representation. Leaving depreciation out of an Income Statement and accumulated depreciation out of a Balance Sheet would also not provide "complete" reports.

  • Relevance: All information that can affect a manager's decision-making should be reported. Depreciation can affect decisions, such as a manager deciding to sell a vehicle after 3 years while it still has good value, before it depreciates further.

Straight-Line Depreciation

  • The straight-line method allocates the same amount of depreciation every reporting period, regardless of the asset's age.

  • It is used for assets that have a consistent revenue-earning capacity over their life (i.e., assets that have the same revenue-earning ability regardless of age).

  • Example: Office furniture like a desk has a constant revenue-earning ability whether it is in its first year or fourth year of use.

Calculating Straight-Line Method

  • The formula for straight-line depreciation is: Depreciation per annum=Cost – Residual (scrap) valueEstimated life\text{Depreciation per annum} = \frac{\text{Cost – Residual (scrap) value}}{\text{Estimated life}}

    • Cost: The original (historical) cost of the non-current asset + any one-off costs.

    • Scrap value (or residual value/salvage value): The amount you would receive at the end of the asset's life when disposed of.

    • Useful life: The estimated life of the asset in years.

Straight Line Depreciation Example

Year

Carrying value at Start

Depreciation

Carrying value at end

2022

1100011000

25002500

85008500

2023

85008500

25002500

60006000

2024

60006000

25002500

35003500

2025

35003500

25002500

10001000

The Cost of an Asset

  • Before depreciating an asset, it is important to understand what makes up the cost of an asset.

  • The two elements are:

    • The purchase price of an asset

    • All other costs incurred to get the asset into a revenue-earning capacity.

  • It is important to differentiate between:

    • A cost incurred to get the asset into a revenue-earning capacity (one-off costs)

    • A cost incurred after the NCA is acquired (ongoing costs)

Example – Cost of Delivery Van

  • A business buys a new delivery van for 30,00030,000 (purchase price) and pays the following:

    • Government stamp duty: 20002000 (one-off cost)

    • Dealer’s charges: 10001000 (one-off cost)

    • Insurance & registration: 10001000 per annum (ongoing cost)

  • The cost of the asset includes the purchase price, stamp duty, and dealer's charges.

Example – Calculating the cost of Delivery Van (Continued)

  • Cost of Vehicle = 30,00030,000 (Purchase price) + 2,0002,000 (stamp duty) + 1,0001,000 (dealers’s charges) = 33,00033,000

  • These items are part of the cost of the vehicle to get it ready to earn revenue and are one-off payments.

  • Insurance & registration cost of 10001000 per year isn’t included in the cost of the vehicle because it is not paid to get the asset into a revenue-earning capacity.

  • It is payable every year as an ongoing cost and is therefore a separate expense.

Example – Straight-Line Depreciation

  • Consider an office desk purchased for cash 14001400 + GST on 1 July 2022.

    • Estimated useful life: 4 years

    • Estimated residual value: 200200

    <br>Depreciation per annum=Cost – Residual valueEstimated life=1400–2004=12004=<br>\text{Depreciation per annum} = \frac{\text{Cost – Residual value}}{\text{Estimated life}} = \frac{1400 – 200}{4} = \frac{1200}{4} =300 \text{ per annum}
    </p></li></ul><h4id="0a6ac5e7−17e3−4852−9d4e−f3bfe140ae2e"data−toc−id="0a6ac5e7−17e3−4852−9d4e−f3bfe140ae2e"collapsed="false"seolevelmigrated="true">HowtoRecordStraight−LineDepreciationintheGeneralJournal</h4><tablestyle="min−width:100px"><colgroup><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"></colgroup><tbody><tr><thcolspan="1"rowspan="1"><p>Date</p></th><thcolspan="1"rowspan="1"><p>Accounts</p></th><thcolspan="1"rowspan="1"><p>Dr</p></th><thcolspan="1"rowspan="1"><p>Cr</p></th></tr><tr><tdcolspan="1"rowspan="1"><p>Jun302023</p></td><tdcolspan="1"rowspan="1"><p>Depreciationofofficedesk</p></td><tdcolspan="1"rowspan="1"><p></p></li></ul><h4 id="0a6ac5e7-17e3-4852-9d4e-f3bfe140ae2e" data-toc-id="0a6ac5e7-17e3-4852-9d4e-f3bfe140ae2e" collapsed="false" seolevelmigrated="true">How to Record Straight-Line Depreciation in the General Journal</h4><table style="min-width: 100px"><colgroup><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"></colgroup><tbody><tr><th colspan="1" rowspan="1"><p>Date</p></th><th colspan="1" rowspan="1"><p>Accounts</p></th><th colspan="1" rowspan="1"><p>Dr</p></th><th colspan="1" rowspan="1"><p>Cr</p></th></tr><tr><td colspan="1" rowspan="1"><p>Jun 30 2023</p></td><td colspan="1" rowspan="1"><p>Depreciation of office desk</p></td><td colspan="1" rowspan="1"><p>300</p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p>Accumulateddepreciationofofficedesk</p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>Accumulated depreciation of office desk</p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>300</p></td></tr><tr><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p><em>Adjustingentryfordepreciation–straightlinemethod</em></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr></tbody></table><ul><li><p>Depreciationisanexpense,soanincreaseindepreciationexpenseisadebitentry.Itisreportedunder"otherexpenses”intheincomestatement.</p></li><li><p>Accumulateddepreciationisthetotalamountofdepreciationthathasbeenwrittenoffsofar(sincethebusinesshascontrolledtheasset),andthisisanegativeassetaccount(balancesheet).Thisiswhytheaccumulateddepreciationaccountisalwaysacreditentry.</p></li></ul><h4id="147d4a48−493c−45bf−bbcb−db856905750a"data−toc−id="147d4a48−493c−45bf−bbcb−db856905750a"collapsed="false"seolevelmigrated="true">HowtoRecordStraight−LineDepreciationintheGeneralLedger</h4><p><strong>Depreciationofofficedesk</strong></p><tablestyle="min−width:150px"><colgroup><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"></colgroup><tbody><tr><thcolspan="1"rowspan="1"><p>Date</p></th><thcolspan="1"rowspan="1"><p>Crossreference</p></th><thcolspan="1"rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p><em>Adjusting entry for depreciation – straight line method</em></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr></tbody></table><ul><li><p>Depreciation is an expense, so an increase in depreciation expense is a debit entry. It is reported under "other expenses” in the income statement.</p></li><li><p>Accumulated depreciation is the total amount of depreciation that has been written off so far (since the business has controlled the asset), and this is a negative asset account (balance sheet). This is why the accumulated depreciation account is always a credit entry.</p></li></ul><h4 id="147d4a48-493c-45bf-bbcb-db856905750a" data-toc-id="147d4a48-493c-45bf-bbcb-db856905750a" collapsed="false" seolevelmigrated="true">How to Record Straight-Line Depreciation in the General Ledger</h4><p><strong>Depreciation of office desk</strong></p><table style="min-width: 150px"><colgroup><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"></colgroup><tbody><tr><th colspan="1" rowspan="1"><p>Date</p></th><th colspan="1" rowspan="1"><p>Cross reference</p></th><th colspan="1" rowspan="1"><p>

    Date

    Cross reference

    </p></th></tr><tr><tdcolspan="1"rowspan="1"><p>Jun302023</p></td><tdcolspan="1"rowspan="1"><p>Accumulateddep’nofofficedesk</p></td><tdcolspan="1"rowspan="1"><p>300</p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr></tbody></table><p><strong>AccumulatedDepreciationofofficedesk</strong></p><tablestyle="min−width:150px"><colgroup><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"></colgroup><tbody><tr><thcolspan="1"rowspan="1"><p>Date</p></th><thcolspan="1"rowspan="1"><p>Crossreference</p></th><thcolspan="1"rowspan="1"><p></p></th></tr><tr><td colspan="1" rowspan="1"><p>Jun 30 2023</p></td><td colspan="1" rowspan="1"><p>Accumulated dep’n of office desk</p></td><td colspan="1" rowspan="1"><p>300</p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr></tbody></table><p><strong>Accumulated Depreciation of office desk</strong></p><table style="min-width: 150px"><colgroup><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"></colgroup><tbody><tr><th colspan="1" rowspan="1"><p>Date</p></th><th colspan="1" rowspan="1"><p>Cross reference</p></th><th colspan="1" rowspan="1"><p>

    Date

    Cross reference

    </p></th></tr><tr><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p>Jun302023</p></td><tdcolspan="1"rowspan="1"><p>Depreciationofofficedesk</p></td><tdcolspan="1"rowspan="1"><p>300</p></td></tr></tbody></table><h4id="ce73bde7−4b5a−41e3−b6c0−205d9e1aa0cd"data−toc−id="ce73bde7−4b5a−41e3−b6c0−205d9e1aa0cd"collapsed="false"seolevelmigrated="true">HowtoRecordStraight−LineDepreciationintheGeneralLedgeroverMultipleYears</h4><p><strong>Depreciationofofficedesk</strong></p><tablestyle="min−width:150px"><colgroup><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"></colgroup><tbody><tr><thcolspan="1"rowspan="1"><p>Date</p></th><thcolspan="1"rowspan="1"><p>Crossreference</p></th><thcolspan="1"rowspan="1"><p></p></th></tr><tr><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>Jun 30 2023</p></td><td colspan="1" rowspan="1"><p>Depreciation of office desk</p></td><td colspan="1" rowspan="1"><p>300</p></td></tr></tbody></table><h4 id="ce73bde7-4b5a-41e3-b6c0-205d9e1aa0cd" data-toc-id="ce73bde7-4b5a-41e3-b6c0-205d9e1aa0cd" collapsed="false" seolevelmigrated="true">How to Record Straight-Line Depreciation in the General Ledger over Multiple Years</h4><p><strong>Depreciation of office desk</strong></p><table style="min-width: 150px"><colgroup><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"></colgroup><tbody><tr><th colspan="1" rowspan="1"><p>Date</p></th><th colspan="1" rowspan="1"><p>Cross reference</p></th><th colspan="1" rowspan="1"><p>

    Date

    Cross reference


    Jun 30 2023

    Depreciation of office desk

    300

    30 Jun 2023

    P&L Summary

    300

    Jun 30 2024

    Depreciation of office desk

    300

    30 Jun 2024

    P&L Summary

    300

    Accumulated Depreciation of office desk

    Date

    Cross reference


    Date

    Cross reference

    </p></th></tr><tr><tdcolspan="1"rowspan="1"><p>Jun302023</p></td><tdcolspan="1"rowspan="1"><p>Accum.dep’nofofficedesk</p></td><tdcolspan="1"rowspan="1"><p></p></th></tr><tr><td colspan="1" rowspan="1"><p>Jun 30 2023</p></td><td colspan="1" rowspan="1"><p>Accum. dep’n of office desk</p></td><td colspan="1" rowspan="1"><p>300</p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><tdcolspan="1"rowspan="1"><p>Jun302024</p></td><tdcolspan="1"rowspan="1"><p>Balance</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p>Jun 30 2024</p></td><td colspan="1" rowspan="1"><p>Balance</p></td><td colspan="1" rowspan="1"><p>600</p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><tdcolspan="1"rowspan="1"><p>Jun302024</p></td><tdcolspan="1"rowspan="1"><p>Accum.dep’nofofficedesk</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p>Jun 30 2024</p></td><td colspan="1" rowspan="1"><p>Accum. dep’n of office desk</p></td><td colspan="1" rowspan="1"><p>300</p></td><tdcolspan="1"rowspan="1"><p>1July2024</p></td><tdcolspan="1"rowspan="1"><p>Balance</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>1 July 2024</p></td><td colspan="1" rowspan="1"><p>Balance</p></td><td colspan="1" rowspan="1"><p>600</p></td></tr><tr><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>600</p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>600</p></td></tr></tbody></table><ul><li><p>Depreciationexpenseisclosedoffforeachreportingperiod(asitisanexpense).</p></li><li><p>Accumulateddepreciationiscarriedforwardtofutureperiods(asitisanegativeasset).</p></li><li><p>Theclosingbalanceof</p></td></tr></tbody></table><ul><li><p>Depreciation expense is closed off for each reporting period (as it is an expense).</p></li><li><p>Accumulated depreciation is carried forward to future periods (as it is a negative asset).</p></li><li><p>The closing balance of600foraccumulateddepreciationrepresentsthetotaldepreciationexpenserecordedoverthetwoyears.</p></li></ul><h4id="d86e6dd5−1f52−4a43−b3fd−ac507ddd783c"data−toc−id="d86e6dd5−1f52−4a43−b3fd−ac507ddd783c"collapsed="false"seolevelmigrated="true">ReportingAccumulatedDepreciationintheBalanceSheet</h4><ul><li><p>Accumulateddepreciationisanegativeassetandisdeductedfromthecostofanassetinthebalancesheettodeterminethecarryingvalue.</p></li></ul><p><strong>Balancesheet(extract)asat30June</strong></p><tablestyle="min−width:125px"><colgroup><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"><colstyle="min−width:25px"></colgroup><tbody><tr><thcolspan="1"rowspan="1"><p></p></th><thcolspan="1"rowspan="1"><p>2023</p></th><thcolspan="1"rowspan="1"><p>2024</p></th><thcolspan="1"rowspan="1"><p>2025</p></th><thcolspan="1"rowspan="1"><p>2026</p></th></tr><tr><tdcolspan="1"rowspan="1"><p><em>Non−currentassets</em></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><tdcolspan="1"rowspan="1"><p>Officedesk(purchaseprice)</p></td><tdcolspan="1"rowspan="1"><p>for accumulated depreciation represents the total depreciation expense recorded over the two years.</p></li></ul><h4 id="d86e6dd5-1f52-4a43-b3fd-ac507ddd783c" data-toc-id="d86e6dd5-1f52-4a43-b3fd-ac507ddd783c" collapsed="false" seolevelmigrated="true">Reporting Accumulated Depreciation in the Balance Sheet</h4><ul><li><p>Accumulated depreciation is a negative asset and is deducted from the cost of an asset in the balance sheet to determine the carrying value.</p></li></ul><p><strong>Balance sheet (extract) as at 30 June</strong></p><table style="min-width: 125px"><colgroup><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"><col style="min-width: 25px"></colgroup><tbody><tr><th colspan="1" rowspan="1"><p></p></th><th colspan="1" rowspan="1"><p>2023</p></th><th colspan="1" rowspan="1"><p>2024</p></th><th colspan="1" rowspan="1"><p>2025</p></th><th colspan="1" rowspan="1"><p>2026</p></th></tr><tr><td colspan="1" rowspan="1"><p><em>Non-current assets</em></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p>Office desk (purchase price)</p></td><td colspan="1" rowspan="1"><p>1400</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>1400</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>1400</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>1400</p></td></tr><tr><tdcolspan="1"rowspan="1"><p>lessAccumulateddepreciation</p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p>less Accumulated depreciation</p></td><td colspan="1" rowspan="1"><p>300</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>600</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>900</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>1200</p></td></tr><tr><tdcolspan="1"rowspan="1"><p>CarryingValue</p></td><tdcolspan="1"rowspan="1"><p></p></td></tr><tr><td colspan="1" rowspan="1"><p>Carrying Value</p></td><td colspan="1" rowspan="1"><p>1100</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>800</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>500</p></td><tdcolspan="1"rowspan="1"><p></p></td><td colspan="1" rowspan="1"><p>200</p></td></tr></tbody></table><ul><li><p>Theoriginalestimateoftheusefullifeofthisassetwas4years.Afterthattime,theasset’scarryingvalueinthebalancesheethasbeenreducedtotheoriginalestimateofitsresidualvalue,whichwas</p></td></tr></tbody></table><ul><li><p>The original estimate of the useful life of this asset was 4 years. After that time, the asset’s carrying value in the balance sheet has been reduced to the original estimate of its residual value, which was200.</p></li></ul><h4id="1709e661−138f−4ea5−8b0d−155bd00a8f2d"data−toc−id="1709e661−138f−4ea5−8b0d−155bd00a8f2d"collapsed="false"seolevelmigrated="true">KeyTerms</h4><ol><li><p>Historicalcost(purchaseprice)</p></li><li><p>AccumulatedDepreciation</p></li><li><p>CarryingValue(theremainingvalueofaNCAyettobeusedupi.ewhattheNCAiscurrentlyworth)</p></li></ol><h4id="c03eaab4−7237−4e00−9cdb−b6298ef6c7d1"data−toc−id="c03eaab4−7237−4e00−9cdb−b6298ef6c7d1"collapsed="false"seolevelmigrated="true">ReportingDepreciationintheIncomeStatement</h4><p><strong>ExtractfromIncomeStatement(example)</strong></p><p>AdjustedGrossProfit.</p></li></ul><h4 id="1709e661-138f-4ea5-8b0d-155bd00a8f2d" data-toc-id="1709e661-138f-4ea5-8b0d-155bd00a8f2d" collapsed="false" seolevelmigrated="true">Key Terms</h4><ol><li><p>Historical cost (purchase price)</p></li><li><p>Accumulated Depreciation</p></li><li><p>Carrying Value (the remaining value of a NCA yet to be used up i.e what the NCA is currently worth)</p></li></ol><h4 id="c03eaab4-7237-4e00-9cdb-b6298ef6c7d1" data-toc-id="c03eaab4-7237-4e00-9cdb-b6298ef6c7d1" collapsed="false" seolevelmigrated="true">Reporting Depreciation in the Income Statement</h4><p><strong>Extract from Income Statement (example)</strong></p><p>Adjusted Gross Profit46798</p><p>Add:OtherRevenue</p><p>DiscountRevenue</p><p>Add: Other Revenue</p><p>Discount Revenue340</p><p></p><p>47138</p><p>Less:OtherExpense:</p><p>DepreciationVehicle</p><p>Less: Other Expense:</p><p>Depreciation Vehicle1200</p><p>Depreciationofficedesk</p><p>Depreciation office desk300</p><p>Wages</p><p>Wages12000</p><ul><li><p>EachNon−currentassetwillhaveitsownlinefordepreciation.Thissatisfiesunderstandabilityandcomparability,asauseroftheinformationcanclearlyseehowmuchanassethasbeendepreciatedby,withoutconfusingitwithanotherasset,andcancomparethiswithpreviousperiods.Thisalsoappliesforaccumulateddepreciationinthebalancesheet.</p></li></ul><h4id="21b37ac1−b9ea−48ee−bb4a−c73452ff404e"data−toc−id="21b37ac1−b9ea−48ee−bb4a−c73452ff404e"collapsed="false"seolevelmigrated="true">DepreciationforPartofaPeriod</h4><ul><li><p>Iftheofficedeskwaspurchasedon1Januaryor1March,andtheperiodconcludedon30June,depreciationneedstobeadjusted.</p></li><li><p>Alwayscalculatedepreciationforawholeyearfirst.Then,determinehowlongtheassethasbeenunderthecontroloftheentityinthecurrentreportingperiod.</p><ul><li><p>Ifpurchasedon1January,theassetwouldhavebeenusedfor6monthsbybalanceday(30thJune).</p></li><li><p>Ifpurchasedon1March,theassetwouldhavebeenusedfor4monthsbybalanceday(30thJune).</p></li></ul></li></ul><h4id="e30f726f−cc9b−41c9−b5f7−710256fc57da"data−toc−id="e30f726f−cc9b−41c9−b5f7−710256fc57da"collapsed="false"seolevelmigrated="true">AdjustingforPartialPeriods</h4><ul><li><p>Thecalculationsfordepreciationwouldneedtobeadjustedasfollows:</p></li><li><p>Depreciation=</p><ul><li><p>Each Non-current asset will have its own line for depreciation. This satisfies understandability and comparability, as a user of the information can clearly see how much an asset has been depreciated by, without confusing it with another asset, and can compare this with previous periods. This also applies for accumulated depreciation in the balance sheet.</p></li></ul><h4 id="21b37ac1-b9ea-48ee-bb4a-c73452ff404e" data-toc-id="21b37ac1-b9ea-48ee-bb4a-c73452ff404e" collapsed="false" seolevelmigrated="true">Depreciation for Part of a Period</h4><ul><li><p>If the office desk was purchased on 1 January or 1 March, and the period concluded on 30 June, depreciation needs to be adjusted.</p></li><li><p>Always calculate depreciation for a whole year first. Then, determine how long the asset has been under the control of the entity in the current reporting period.</p><ul><li><p>If purchased on 1 January, the asset would have been used for 6 months by balance day (30th June).</p></li><li><p>If purchased on 1 March, the asset would have been used for 4 months by balance day (30th June).</p></li></ul></li></ul><h4 id="e30f726f-cc9b-41c9-b5f7-710256fc57da" data-toc-id="e30f726f-cc9b-41c9-b5f7-710256fc57da" collapsed="false" seolevelmigrated="true">Adjusting for Partial Periods</h4><ul><li><p>The calculations for depreciation would need to be adjusted as follows:</p></li><li><p>Depreciation =300perannumorper annum or300 \div 12 = 25permonth</p><ul><li><p>Ifpurchasedon1January:25 per month</p><ul><li><p>If purchased on 1 January:25permonthx6months=per month x 6 months =150depreciationexpense</p></li><li><p>Ifpurchasedon1March:depreciation expense</p></li><li><p>If purchased on 1 March:25permonthx4months=per month x 4 months =100$$ depreciation expense

Important Notes

  1. Depreciation is another expense that does not involve any payment of cash.

  2. Never report any balance for accumulated depreciation in the Income Statement. Accumulated Depreciation is shown in the Balance Sheet. Similarly, depreciation expense is never reported in the balance sheet, always in the income statement.

  3. Depreciation or Accumulated depreciation is NEVER reported in the Cash Flow Statement. This is because depreciation does not involve an inflow or outflow of cash

  • Depreciation is NOT a cash item, along with:

    • Discount expense,

    • Cost of Sales,

    • Inventory Loss, etc.