{"id":3621,"date":"2020-10-21T16:40:24","date_gmt":"2020-10-21T16:40:24","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&p=3621"},"modified":"2020-11-13T13:54:39","modified_gmt":"2020-11-13T13:54:39","slug":"introduction-to-depreciation-expense","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/introduction-to-depreciation-expense\/","title":{"raw":"Introduction to Depreciation Expense","rendered":"Introduction to Depreciation Expense"},"content":{"raw":"

What you will learn to do: Compute depreciation expense on plant assets<\/h2>\r\nIn the prior section, we recorded the large-scale purchases by Spivey Company into the GL control accounts:\r\n\r\n\"Three<\/a>\r\n\r\nIn addition, we would have recorded those same transactions into a subsidiary ledger or a fixed assets detail list. For convenience, let\u2019s assume the July 1 purchase of machinery was one large machine, and that the lump sum purchase on October 1 was further allocated to the individual assets. Since we don\u2019t have the time or room to account for all the items, we\u2019ll call the individual assets (1) delivery van, (2) machine, (3) office furniture, and (4) computer. In reality, you would break this list down into the smallest detail that made sense for your business; usually each individual asset would get its own line. Here is an example of a fixed asset item list:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Fixed Assets<\/caption>\r\n
As of 12\/31\/20X1<\/strong><\/td>\r\n<\/tr>\r\n
Spivey Company<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Asset<\/th>\r\nDescription<\/th>\r\nDate Purchased<\/th>\r\nCost<\/th>\r\n<\/tr>\r\n
1<\/td>\r\nLand<\/td>\r\n2\/1\/20X1<\/td>\r\n262,800<\/td>\r\n<\/tr>\r\n
2<\/td>\r\nBuilding<\/td>\r\n7\/1\/20X1<\/td>\r\n490,000<\/td>\r\n<\/tr>\r\n
3<\/td>\r\nMachine<\/td>\r\n7\/1\/20X1<\/td>\r\n162,000<\/td>\r\n<\/tr>\r\n
4<\/td>\r\nLand<\/td>\r\n10\/1\/20X1<\/td>\r\n120,000<\/td>\r\n<\/tr>\r\n
5<\/td>\r\nBuilding<\/td>\r\n10\/1\/20X1<\/td>\r\n600,000<\/td>\r\n<\/tr>\r\n
6<\/td>\r\nDelivery Van<\/td>\r\n10\/1\/20X1<\/td>\r\n45,000<\/td>\r\n<\/tr>\r\n
7<\/td>\r\nMachine<\/td>\r\n10\/1\/20X1<\/td>\r\n99,500<\/td>\r\n<\/tr>\r\n
8<\/td>\r\nOffice Furniture<\/td>\r\n10\/1\/20X1<\/td>\r\n70,000<\/td>\r\n<\/tr>\r\n
9<\/td>\r\nComputer<\/td>\r\n10\/1\/20X1<\/td>\r\n5,500<\/td>\r\n<\/tr>\r\n
Total PP&E<\/th>\r\n$ 1,854,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe total of the three GL accounts above equal the total of the fixed asset item list, but we accountants would probably sort the list to better match the GL:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Fixed Assets<\/caption>\r\n
As of 12\/31\/20X1<\/strong><\/td>\r\n<\/tr>\r\n
Spivey Company<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Asset<\/th>\r\nDescription<\/th>\r\nDate Purchased<\/th>\r\nCost<\/th>\r\n<\/tr>\r\n
1<\/td>\r\nLand<\/td>\r\n2\/1\/20X1<\/td>\r\n262,800<\/td>\r\n<\/tr>\r\n
4<\/td>\r\nLand<\/td>\r\n10\/1\/20X1<\/td>\r\n120,000<\/td>\r\n<\/tr>\r\n
Total Land<\/strong><\/th>\r\n382,800<\/td>\r\n<\/tr>\r\n
2<\/td>\r\nBuilding<\/td>\r\n7\/1\/20X1<\/td>\r\n490,000<\/td>\r\n<\/tr>\r\n
5<\/td>\r\nBuilding<\/td>\r\n10\/1\/20X1<\/td>\r\n600,000<\/td>\r\n<\/tr>\r\n
Total Buildings<\/strong><\/th>\r\n1,090,000<\/td>\r\n<\/tr>\r\n
3<\/td>\r\nMachine<\/td>\r\n7\/1\/20X1<\/td>\r\n162,000<\/td>\r\n<\/tr>\r\n
6<\/td>\r\nDelivery Van<\/td>\r\n10\/1\/20X1<\/td>\r\n45,000<\/td>\r\n<\/tr>\r\n
7<\/td>\r\nMachine<\/td>\r\n10\/1\/20X1<\/td>\r\n99,500<\/td>\r\n<\/tr>\r\n
8<\/td>\r\nOffice Furniture<\/td>\r\n10\/1\/20X1<\/td>\r\n70,000<\/td>\r\n<\/tr>\r\n
9<\/td>\r\nComputer<\/td>\r\n10\/1\/20X1<\/td>\r\n5,500<\/td>\r\n<\/tr>\r\n
Total Machinery and Equipment<\/strong><\/th>\r\n382,000<\/td>\r\n<\/tr>\r\n
Total PP&E<\/th>\r\n$ 1,854,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSome companies will have more categories or different ones, for instance, breaking out vehicles, office equipment, or even computers into separate GL control accounts.\r\n\r\nAll this information is gathered and tracked and used to compute depreciation, accumulated depreciation, and eventually gain or loss on the sale of an asset. So, for step one we need to decide on a method of depreciation and apply it.\r\n\r\nTo compute the amount of depreciation expense, accountants consider four major factors:\r\n
    \r\n \t
  1. Cost of the asset (covered in the prior section).<\/li>\r\n \t
  2. Proposed method of depreciation.<\/li>\r\n \t
  3. Estimated useful life of the asset.<\/li>\r\n \t
  4. Estimated salvage value of the asset. Salvage value (or scrap value or residual value) is the amount of money the company expects to recover, minus disposal costs, on the date a plant asset is scrapped, sold, or traded in.<\/li>\r\n<\/ol>\r\nLand won\u2019t be depreciated because in theory it has an unlimited useful life, but all the other fixed assets will depreciate.","rendered":"

    What you will learn to do: Compute depreciation expense on plant assets<\/h2>\n

    In the prior section, we recorded the large-scale purchases by Spivey Company into the GL control accounts:<\/p>\n

    \"Three<\/a><\/p>\n

    In addition, we would have recorded those same transactions into a subsidiary ledger or a fixed assets detail list. For convenience, let\u2019s assume the July 1 purchase of machinery was one large machine, and that the lump sum purchase on October 1 was further allocated to the individual assets. Since we don\u2019t have the time or room to account for all the items, we\u2019ll call the individual assets (1) delivery van, (2) machine, (3) office furniture, and (4) computer. In reality, you would break this list down into the smallest detail that made sense for your business; usually each individual asset would get its own line. Here is an example of a fixed asset item list:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
    Fixed Assets<\/caption>\n
    As of 12\/31\/20X1<\/strong><\/td>\n<\/tr>\n
    Spivey Company<\/strong><\/td>\n<\/tr>\n
    <\/td>\n<\/tr>\n
    Asset<\/th>\nDescription<\/th>\nDate Purchased<\/th>\nCost<\/th>\n<\/tr>\n
    1<\/td>\nLand<\/td>\n2\/1\/20X1<\/td>\n262,800<\/td>\n<\/tr>\n
    2<\/td>\nBuilding<\/td>\n7\/1\/20X1<\/td>\n490,000<\/td>\n<\/tr>\n
    3<\/td>\nMachine<\/td>\n7\/1\/20X1<\/td>\n162,000<\/td>\n<\/tr>\n
    4<\/td>\nLand<\/td>\n10\/1\/20X1<\/td>\n120,000<\/td>\n<\/tr>\n
    5<\/td>\nBuilding<\/td>\n10\/1\/20X1<\/td>\n600,000<\/td>\n<\/tr>\n
    6<\/td>\nDelivery Van<\/td>\n10\/1\/20X1<\/td>\n45,000<\/td>\n<\/tr>\n
    7<\/td>\nMachine<\/td>\n10\/1\/20X1<\/td>\n99,500<\/td>\n<\/tr>\n
    8<\/td>\nOffice Furniture<\/td>\n10\/1\/20X1<\/td>\n70,000<\/td>\n<\/tr>\n
    9<\/td>\nComputer<\/td>\n10\/1\/20X1<\/td>\n5,500<\/td>\n<\/tr>\n
    Total PP&E<\/th>\n$ 1,854,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    The total of the three GL accounts above equal the total of the fixed asset item list, but we accountants would probably sort the list to better match the GL:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
    Fixed Assets<\/caption>\n
    As of 12\/31\/20X1<\/strong><\/td>\n<\/tr>\n
    Spivey Company<\/strong><\/td>\n<\/tr>\n
    <\/td>\n<\/tr>\n
    Asset<\/th>\nDescription<\/th>\nDate Purchased<\/th>\nCost<\/th>\n<\/tr>\n
    1<\/td>\nLand<\/td>\n2\/1\/20X1<\/td>\n262,800<\/td>\n<\/tr>\n
    4<\/td>\nLand<\/td>\n10\/1\/20X1<\/td>\n120,000<\/td>\n<\/tr>\n
    Total Land<\/strong><\/th>\n382,800<\/td>\n<\/tr>\n
    2<\/td>\nBuilding<\/td>\n7\/1\/20X1<\/td>\n490,000<\/td>\n<\/tr>\n
    5<\/td>\nBuilding<\/td>\n10\/1\/20X1<\/td>\n600,000<\/td>\n<\/tr>\n
    Total Buildings<\/strong><\/th>\n1,090,000<\/td>\n<\/tr>\n
    3<\/td>\nMachine<\/td>\n7\/1\/20X1<\/td>\n162,000<\/td>\n<\/tr>\n
    6<\/td>\nDelivery Van<\/td>\n10\/1\/20X1<\/td>\n45,000<\/td>\n<\/tr>\n
    7<\/td>\nMachine<\/td>\n10\/1\/20X1<\/td>\n99,500<\/td>\n<\/tr>\n
    8<\/td>\nOffice Furniture<\/td>\n10\/1\/20X1<\/td>\n70,000<\/td>\n<\/tr>\n
    9<\/td>\nComputer<\/td>\n10\/1\/20X1<\/td>\n5,500<\/td>\n<\/tr>\n
    Total Machinery and Equipment<\/strong><\/th>\n382,000<\/td>\n<\/tr>\n
    Total PP&E<\/th>\n$ 1,854,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Some companies will have more categories or different ones, for instance, breaking out vehicles, office equipment, or even computers into separate GL control accounts.<\/p>\n

    All this information is gathered and tracked and used to compute depreciation, accumulated depreciation, and eventually gain or loss on the sale of an asset. So, for step one we need to decide on a method of depreciation and apply it.<\/p>\n

    To compute the amount of depreciation expense, accountants consider four major factors:<\/p>\n

      \n
    1. Cost of the asset (covered in the prior section).<\/li>\n
    2. Proposed method of depreciation.<\/li>\n
    3. Estimated useful life of the asset.<\/li>\n
    4. Estimated salvage value of the asset. Salvage value (or scrap value or residual value) is the amount of money the company expects to recover, minus disposal costs, on the date a plant asset is scrapped, sold, or traded in.<\/li>\n<\/ol>\n

      Land won\u2019t be depreciated because in theory it has an unlimited useful life, but all the other fixed assets will depreciate.<\/p>\n\n\t\t\t

      \n\t\t\t

      Candela Citations<\/h3>\n\t\t\t\t\t
      \n\t\t\t\t\t\t
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      CC licensed content, Original<\/div>