Lec 6 Dep Exp, Adjusted Trial Balance Comprehnsive question.pptx

Lec 6 Dep Exp, Adjusted Trial Balance Comprehnsive question.pptx

1. Lec 6 -Depreciation Expense -Adjusted Trial Balance Lec 6: Financial Accounting 1

2. THE CONCEPT OF DEPRECIATION Depreciable assets are physical objects that retain their size and shape but that eventually wear out or become obsolete. They are not physically consumed but nonetheless their economic usefulness diminishes over time . Examples of depreciable assets include buildings and all types of equipment, fixtures, furnishings—and even railroad tracks. Land is not viewed as a depreciable asset, as it has an unlimited useful life. Each period, a portion of a depreciable asset’s usefulness expires. Therefore , a corresponding portion of its cost is recognized as depreciation expense . Depreciation is for tangible assets and amortization is for intangible assets. Lec 6: Financial Accounting 2 Expenses are often called the “costs of doing business,” that is, the cost of the various activities necessary to carry on a business.

3. What is Depreciation Expense? Depreciation is an accounting method that spreads out the cost of an asset over its useful life. Depreciation expense is the cost of an asset that has been depreciated for a single period, and shows how much of the asset's value has been used up in that year. Accumulated depreciation is the total amount of depreciation expense that has been allocated for an asset since the asset was put into use. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company's net income. Accumulated depreciation appears in a contra asset account on the balance sheet reducing the gross amount of fixed assets reported. Lec 6: Financial Accounting 3

4. Depreciation Is Only an Estimate The appropriate amount of depreciation expense is only an estimate. The most widely used means of estimating periodic depreciation expense is the straight-line method of depreciation . Under the straight-line approach, an equal portion of the asset’s cost is allocated to depreciation expense in every period of the asset’s estimated useful life . Salvage Value Salvage value is the amount a company can expect to receive for an asset at the end of the asset's useful life. A company uses salvage value to estimate and calculate depreciate as salvage value is deducted from the asset's original cost. A company can also use salvage value to anticipate cashflow and expected future proceeds. Lec 6: Financial Accounting 4 - Salvage Value

5. What is Accumulated Deprecation? The accumulated depreciation account is a contra asset account on a company's balance sheet. It represents a credit balance. It appears as a reduction from the gross amount of fixed assets reported. Accumulated depreciation specifies the total amount of an asset's wear to date in the asset's useful life . Lec 6: Financial Accounting 5

6. Example Let us take the example of a company to calculate the depreciation expense during the year and illustrate the journal entry of the depreciation expense in the financial statements. The following facts are available: On January 1, 2018, the company bought a piece of equipment worth $6,000 The equipment is estimated to have a useful life of 3 years The equipment is not expected to have any salvage value at the end of its useful life The company intends to follow the straight-line depreciation method over the three years of life Since the company will use the equipment for the next three years, the cost can be spread across the next three years. The annual depreciation for the equipment as per the straight-line method can be calculated , Annual depreciation = ( $6,000 – 0 ) / 3 = $2,000 a year over the next 3 years . Therefore, it will be recorded according for the next three years on the last day of each year. Lec 6: Financial Accounting 6 Date Account Name Debit Credit December 31, 2016 Depreciation Expense Account $2,000 Accumulated Depreciation Account $2,000

7. Adjusted trial balance What is an Adjusted Trial Balance? An adjusted trial balance is a listing of the ending balances in all accounts after adjusting entries have been prepared. The intent of adding these entries is to correct errors in the initial version of the trial balance and to bring the entity's financial statements into compliance with an accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards . It is used to…… To verify that the total of the debit balances in all accounts equals the total of all credit balances in all accounts; and To be used to construct financial statements (specifically, the income statement and balance sheet; construction of the statement of cash flows requires additional information). Lec 6: Financial Accounting 7

8. Lec 6: Financial Accounting 8

9. Lec 6: Financial Accounting 9

10. Lec 6: Financial Accounting 10

11. Lec 6: Financial Accounting 11

12. Sol: 4.5 Lec 6: Financial Accounting 12

13. Lec 6: Financial Accounting 13 Ex. 4.12: The unadjusted and adjusted trial balances for Tinker Corporation on December 31, 2011, are shown below Required: Journalize the nine adjusting entries that the company made on December 31, 2011.

14. Lec 6: Financial Accounting 14 Sol: 4.12

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16. Lec 6: Financial Accounting 16

17. Sol: Pr 4.1 Lec 6: Financial Accounting 17