Depreciation

Depreciation

Depreciation used in conjunction with PPE eg Furniture

Amortisation is used with Intangible assets eg lease

Both mean the same

Definition

Depreciation (amortisation) is the allocation of the cost of the asset (fulfils matching principle) to the accounting periods in which it is expected that the asset will contribute to the production of revenue.

Matching Principle

Matching Principle – (applied to calculate profit) revenues earned are matched to expenses incurred in the one accounting period.

Balance day adjustments occur on balance day ie 30 June each year

Depreciation is a balance day adjustment

The necessary double entry is:Depreciation DrAccumulated Depreciation Cr

Depreciation: expense therefore Dr

Accumulated Depreciation: contra asset therefore Cr

Accumulated depreciation is the aggregate of the depreciation expenses at a given point in time.

Depreciation accounts, because they are expenses, are closed at the end of each accounting period (along with all the other expense and revenue accounts) to Profit and Loss Summary.

The Accumulated Depreciation a/c, because it is a contra asset a/c will be listed in the balance sheet along with its ‘parent’ asset a/c.

Depreciation accounts, because they are expenses, are closed at the end of each accounting period (along with all the other expense and revenue accounts) to Profit and Loss Summary.

The Accumulated Depreciation a/c, because it is a contra asset a/c will be listed in the balance sheet along with its ‘parent’ asset a/c.

Historical Cost Assumption

– assets should be recorded at their original cost. The accounts must be maintained at this value until the asset is disposed or further capital expenditure has occurred. This means that if a business purchases a vehicle for

$50,000 five years ago, in the motor vehicle a/c and the balance sheet it will still be listed at $50,000.

Even though the vehicle may not be worth $50,000 the business will only realise how much it is worth on the open market when it is sold.

The Accumulated Depreciation a/c (contra asset) allows the balance sheet to record the asset at historical cost as well as deduct the accumulated depreciation for that asset to demonstrate its net value.

Balance Sheet (extract)as at 30 June

Non-current Asset

Property, Plant and Equipment

Motor Vehicle 50,000

Less: Acc Depn 30,000 20,000