6 Questions
What is the primary purpose of depreciation in accounting?
To match the cost of an asset with the revenue it generates
Which depreciation method allocates the same amount of depreciation expense every year?
Straight-Line Method
What is the journal entry for recording depreciation expense?
Debit Depreciation Expense, Credit Accumulated Depreciation
What is the net book value of an asset?
The asset's original cost minus accumulated depreciation
Why is depreciation important for budgeting and decision-making?
Because it reflects the asset's decreasing value over time
What is the formula for calculating depreciation expense using the Straight-Line Method?
(Cost - Residual Value) / Useful Life
Study Notes
Depreciation in Accounting
Definition
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life.
Reasons for Depreciation
- Assets lose value over time due to wear and tear, obsolescence, and other factors
- Depreciation allows companies to match the cost of an asset with the revenue it generates
- Depreciation provides a more accurate picture of a company's financial performance
Depreciation Methods
-
Straight-Line Method: Depreciation expense is the same every year
- Formula: (Cost - Residual Value) / Useful Life
-
Declining Balance Method: Depreciation expense decreases over time
- Formula: (Cost - Accumulated Depreciation) x Depreciation Rate
-
Units-of-Production Method: Depreciation is based on the number of units produced
- Formula: (Cost - Residual Value) / Total Units Produced
Depreciation Expense Calculation
- Depreciation Expense = (Cost - Residual Value) / Useful Life
- Accumulated Depreciation: The total depreciation expense recorded to date
- Net Book Value: The asset's original cost minus accumulated depreciation
Journal Entries for Depreciation
- Debit: Depreciation Expense
- Credit: Accumulated Depreciation
Importance of Depreciation
- Accurate financial reporting and tax compliance
- Reflects the asset's decreasing value over time
- Helps in budgeting and decision-making for asset replacement or upgrade
Test your understanding of depreciation in accounting, including its definition, reasons, methods, and calculation. Learn how to record depreciation expense and its importance in financial reporting and decision-making.
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