A demonstration, for VCE students in Victoria Australia, as to the nature and treatment of depreciation in basic accounting.

1. Depreciation

2. What is depreciation?

3. Non-current assets Vehicles, computers, equipment, shop fittings etc (are controlled by the business) and provide future economic benefit for the business for more than 12 months.

4. But....... They do not last forever, as they age wear out lose value over time and their ability to earn revenue.

5. Every year.... Part of the value of the non-current asset is consumed over time Therfore the annual consumption becomes an expense Depreciation calculates this annual consumption (expense)

6. On 1st July 2014, Woodrow Farm purchased a computer for $3,000 (plus $300 gst) cash. It will be kept for 3 years and estimated it is worth $0 after 3 years Non current asset:- a future economic benefit to the farm, controlled by the farm and will benefit the farm for more than 12 months.

7. Computer has life of 3 years. Why? the value of the computer consumed should be written off each year as an expense called depreciation the unconsumed portion is reported as a non current asset Depreciation - the allocation of the cost of a non-current asset over its useful life.

8. Purpose Ensure that an accurate (reliable) profit is determined by calculating the expense that is inccurred in the current reporting period.

9. How to calculate depreciation? The formula:- Historical cost less scrap value Useful Life Depreciation of the computer would be: $3000 less $0 3 $1,000 per year

10. The ledger accounts affected Depreciation – shows the annual expense (debit entry) Accumulated depreciation – displays the reduction in the value of the computer ie a ↓ in asset (credit entry)

11. How it would look in the first 12 months? Depreciation 1 Jul 15 $1000 Accumulated Depreciation Accumulated Depreciation $1000 Depreciation 1 Jul 15

12. Reporting time:- -close revenue and expense accounts,- balance assets, liabilities Depreciation (expense) $1000 P and L Summary 30 Jun 16 1 Jul 15 $1000 Accumulated Depreciation Accumulated Depreciation (↓ asset) $1000 Depreciation 1 Jul 15

13. After three years, the ledgers would look like..... Depreciation of Computer 30 Jun 15 Acc Dep computer P and L Summary 30 Jun 16 $1000 $1000 $1000 30 Jun 16 P and L Summary $1000 30 Jun 16 Acc Depn computer $1000 P and L Summary 30 Jun 17 $1000 Acc Depn computer 30 Jun 17 Accumulated Depreciation of Computer 1 Jul 17 $1000 Dep of computer 1 Jul 15 Balance $3000 $1000 1 Jul 16 Dep of computer $1000 Dep of computer 1 Jul 17 $3000 $3000 Balance 1 Jul 18 $3000

14. The Balance Sheet Year 1 Non current assets Computer $3000 Less accumulated depreciation $1000 $2000 Historical cost Carrying value

15. The Balance Sheet Year 2 Non current assets Computer $3000 Less accumulated depreciation $1000 $2000 Historical cost Carrying value

16. The Balance Sheet Year 3 Non current assets Computer $3000 Less accumulated depreciation $3000 $0 Historical cost Carrying value

17. Impact on Owners’ Equity Depreciation expense reduces profit therefore decrease Oe Depreciation reduces the value of the asset therefore accumulated depreciation shows this.