Depreciation: Straight Line Method Explained. Depreciation Tutorial w/ Theory, Formula & Example
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Depreciation: Straight Line Method Explained.
Depreciation Tutorial w/ Theory, Formula & Example
This Video Includes:
Explanation of Depreciation: What it is and isn’t
The Different Depreciation Methods and what They All Have in Common
Straight-Line Depreciation Example
Journal Entry for Recording Straight-Line Depreciation
Review
Depreciation: What it Isn’t
Depreciation does not measure non-current asset valuation
e.g. Cost or Revaluation methods
Depreciation does not represent a store of cash for non-current asset replacement
i.e. It is a non-cash adjustment
Depreciation: What it Is
Depreciation is the application of the ‘Matching Principle’
for Non-Current Assets
i.e. an Expense being Matched to the Revenue the Non-Current Asset Generates
Depreciation links Balance Sheet Assets to the Income Statement
Everything that is on the Balance Sheet will eventually end up flowing through the Income Statement
Different depreciation methods:
3x Main Depreciation Methods
Straight-Line Method
(same depreciation expense each period)
Reducing Balance Method
(higher levels of depreciation early on, with it tapering out over time)
Units of Production Method
(depreciation expense depends on how much the asset was used)
What all Methods have in Common:
All three methods use the same three core pieces of data:
Cost (monetary amount)
Estimated Useful Life (time or units of use)
Residual or Salvage Value (monetary amount)
How to Calculate Straight Line Depreciation:
= (Cost - Residual Value) / Estimated Useful Life
Depreciation Journal Entry:
Dr Depreciation Expense $xxxx
Cr Accumulated Depreciation $xxxx
Review:
Depreciation & the Straight-Line Method
Depreciation is an Expense for Non-Current Assets as part of the Matching Principle
The three main Depreciation Methods are: Straight-Line, Reducing Balance & Units of Production
The key pieces of data for any Depreciation Calculation: Cost, Estimated Useful Life & Residual (or Salvage) Value
Calculate Straight-Line Depreciation: (Cost - Residual Value) / Estimated Useful Life
Journal Entry for Depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation
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