U2 L16 Depreciation - Depreciation You have now been...

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Depreciation You have now been introduced to the concept of adjustments . In a previous lesson, you learned how to adjust for supplies, prepaid expenses , and late invoices. In this lesson, we will introduce the concept of depreciation, the fourth common adjustment. At the end of an accounting period, you must be able to determine the amount by which a fixed asset has decreased in value as a result of usage and time. When fixed assets , such as equipment or automobiles, are purchased by a company, they are expected to bring value to the company over a number of years. As an asset is used over those years, its value decreases as a result of usage, wear and tear, and the simple passage of time. This decrease in value, each year, should be included with the expenses , as the use of the asset helped contribute to the production of revenue for that period. Therefore, depreciation is defined as the process of allocating a part of the cost of a fixed asset as an expense for each accounting period during which the business uses that asset. With the exception of land, all fixed assets should be depreciated at the end of each accounting period. Here is a simple example to demonstrate how depreciation may work. On January 1, 20- 2, a company purchases a truck at a cost of $25,000 and the truck's useful life is expected to be 8 years. One way of calculating the amount by which the truck decreases in value over its life is to evenly divide the cost of the truck over the number of years of useful life. Using this method, the truck will depreciate $3,125 each year ($25,000/8 years). Therefore, it is important, at the end of each year (December 31), to recognize the $3,125 depreciation expense, as the use of the truck over each year helps to produce the revenue for each year. There are two new accounts to be used when adjusting for depreciation. Depreciation Expense is an expense account that shows the amount by which an asset's value is decreased in a given period. This account is debit ed, at the end of each year, when the adjusting entry is recorded. Accumulated Depreciation is a contra-asset account* which is listed with the fixed asset, on the balance sheet , to reduce its value. This account is credit ed, at the end of each year, when the adjusting entry is recorded. The actual fixed asset account, in the ledger , will maintain its original balance, as dictated by the cost principle. Therefore, rather than credit ing the asset itself, the accumulated depreciation account (contra-asset account) is credit ed instead. *Recall that a contra-account always has a type of balance (DR or CR) that is opposite to the account with which it is associated. i.e. GST Recoverable (DR balance) is a contra- account associated with GST Payable (CR balance), Accumulated Depreciation (CR balance) is a contra-account associated with a fixed asset (DR balance).
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The standard journal entry to adjust for the depreciation of an asset at the end of each year would be:
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U2 L16 Depreciation - Depreciation You have now been...

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