FINAL PERIOD

Applies only to fixed assets.

Non-current (fixed) assets are gradually used
up in providing goods and services over time.
Purpose of accounting depreciation is to
spread the cost of a non-current (fixed) asset
over its expected useful life.
Depreciation is a method of allocating cost.
The portion of the cost allocated to a
particular accounting period is charged as
an expense against revenue (Matching principle).
Depreciation is an accounting
process by which a company
allocates an asset’s cost
through its useful life
 Physical Deterioration –
caused by physical wear and tear (rust, rot and decay)
 Obsolescence – The process of becoming obsolete,
outmoded, or out of date.
 Depletion of fixed assets –
an asset that depletes over time as resources are extracted
from it
 Passage of Time –
 There are four main factors to consider
when calculating depreciation expense:

 The cost of the asset

 The estimated salvage value of the asset.
 Estimated useful life of the asset.
 Obsolescence
SCRAP VALUE
 Also known as Residual Value or Salvage Value
BOOK VALUE is an asset's original cost, less any
accumulated depreciation and impairment
charges that have been subsequently incurred.
THE COST OF THE ASSET – this includes taxes,
shipping, and preparation/setup expenses.
DEPRECIABLE AMOUNT
 The
difference between COST and RESIDUAL
VALUE
Straight-line
Unitsof Production
Sum-of-years-digits
Double Declining Balance
 Allocates the cost of the asset to expense
evenly over years asset is used.
 The life of the asset is measured in years.

𝐶𝑜𝑠𝑡 − 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑖𝑓𝑒
Company F purchased a machine that cost
50,000 and it will last for 5 years. A salvage
value was not assigned to the asset.
Question:
Determine the annual depreciation expense
using the straight-line method and prepare the
journal entry to record the expense.
 Depreciable Amount

50,000 − 0
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
5
𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝟏𝟎, 𝟎𝟎𝟎
JOURNAL ENTRY

Depreciation Expense 10,000

Accumulated Depreciation 10,000
Suppose a hotel purchases an air-conditioning
system for Php100,000 and with an installation
cost of Php15,000. The useful life of the air-
conditioning system is for 10 years and with the
residual value of Php20,000.

Calculate the depreciation expense.

 Company Q purchased an equipment that
cost Php250,000 on January 1, 2018. The
equipment will last for 8 years and with a residual
value of Php10,000. On October 1, 2018, the
company purchased another piece of equipment
identical to the first.

Calculate the depreciation expense for 2018 for

each piece of equipment.
ADVANTAGES
 Easy to calculate
 Easy to understand

DISADVANTAGE
 Assumes fixed
asset gives same
amount of service
annually throughout
its useful life
 Compute for depreciation using
straight-line method.
Estimated
Residual Depreciable Annual Book Value
Fixed Asset Cost Useful Life
Value Amount Depreciation after
(Years)
1. Building 7,500,000 30 120,000 12 years
2. Furniture & Fixtures 800,000 15 70,000 5 years
3. Office Equipment 450,000 10 3,000 6 years
4. Air-conditioning System 300,000 10 6,000 8 years
5. Computer System 650,000 5 25,000 1 year
 Depreciable Annual
Fixed Asset Book Value
Amount Depreciation
1. Building 7,380,000.00 246,000.00 4,548,000.00
2. Furniture & Fixtures 730,000.00 48,666.67 556,666.67
3. Office Equipment 447,000.00 44,700.00 181,800.00
4. Air-conditioning System 294,000.00 29,400.00 64,800.00
5. Computer System 625,000.00 125,000.00 525,000.00
(depreciation method)
 (depreciation method)

The units-of-production depreciation method

assigns an equal amount of expense to each
unit produced or service rendered by the
asset.
The total production of the asset is the
criteria for providing depreciation
 (depreciation method)

known as Units of Activity and Units of

Usage Method of Depreciation
 (depreciation method)

The wear and tear (of fixed asset) will depend

on how it was utilized.

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 × 𝑈𝑛𝑖𝑡 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛

𝑊ℎ𝑒𝑟𝑒:
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 = 𝐶𝑜𝑠𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
ABC Textile Co. purchased machinery for Php200,000 on 1st
of January. It has an estimated useful life of 10 years and
estimated residual value of Php20,000. The firm sells the
asset at the residual value at the end of the 10th year. The
machine has an expected production of 15,000 units during
its useful life.
The production pattern will be as follows:
YEAR PRODUCTION
1-3 2000 Units Per Year
4-7 1500 Units Per Year
8-10 1000 Units Per Year
 Compute for the depreciation using
the Units of Production method.
Company F purchased a machine that cost 50,000 and will be able
to produce 500,000 units of product before wearing out. Expected
production by year will be:
year 1 – 120,500 units;
year 2 – 115,000 units;
year 3 – 100,000 units;
year 4 – 100,000 units and
year 5 – 95,000 units.
The salvage value after five years is Php5,000. Determine the
annual depreciation expense using the units-of-production method.
 Sum-of-the-years Digits
 Double-declining Balance
Accelerated depreciation is a depreciation
method whereby an asset loses book value at a
faster rate than the traditional straight-line
method.
Generally, this method allows greater
deductions in the earlier years of an asset and
is used to minimize taxable income.
itlowers the value of its total assets on its
balance sheet earlier in the life of those
assets
companies employ accelerated depreciation
methods when they have assets that they
expect to be more productive in their early
years
helps companies shield income from
taxes
(the higher the depreciation expense-
recorded now, the lower the net income)
less depreciation expenses recorded
later
Thus, accelerated depreciation defers
taxes for companies rather than helps
companies avoid taxes.
 (depreciation
method)
 (depreciation method)

The sum-of-the-years digits method

determines annual depreciation by
multiplying the asset’s depreciable
cost by a series of fractions based on
the sum of the asset’s useful life digits.
 (depreciation method)

𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡

𝑫𝒆𝒑. 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 = ′
× 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑠 𝑑𝑖𝑔𝑖𝑡
The ABC Company purchased a machine on January 1, 2019.
The relevant information is given below:
Cost of the machine: ₱225,000
Expected useful life of machine: 5 years
Salvage value: ₱25,000
REQUIRED: Prepare a schedule showing the depreciation expense
of each year of the useful life of the machine using sum of years’
digits method.
SOLUTION:
The sum of the years digits is 1 + 2 + 3 + 4 + 5 = 15.

Sum of the Years-Digits Depreciation Schedule

Cost: ₱225,000 Useful life: 5
Sum of the years
Salvage value: ₱25,000 digits: 15
Value before Value after
Year Depreciation
Depreciation Depreciation
1 ₱225,000 ₱66,667 ₱158,333
2 158,333 53,333 105,000
3 105,000 40,000 65,000
4 65,000 26,667 38,333
5 38,333 ₱13,333 ₱25,000
You open a pizza shop and buy a
delivery van for a total of
Php600,000. Make a sum of the
years-digits depreciation schedule
using a useful life of 5 years and a
total salvage value of Php15,000.
 Value Before Value after
Year Depreciation
Depreciation Depreciation
1 600,000 195,000.00 405,000.00
2 405,000.00 156,000.00 249,000.00
3 249,000.00 117,000.00 132,000.00
4 132,000.00 78,000.00 54,000.00
5 54,000.00 39,000.00 15,000.00
(depreciation method)
 (depreciation method)

The double-declining balance is a type of

accelerated depreciation method that
calculates a higher depreciation charge in
the first year of an asset’s life and
gradually decreases depreciation expense
in subsequent years.
 (depreciation method)

more depreciation expense is

recorded in the early years than in
later years
 (depreciation method) (depreciation method)
The formula:

The formula: 𝐷𝐷𝐵 = 𝑐𝑜𝑠𝑡 × 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 × 2

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑐𝑜𝑠𝑡

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝. =
𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝐷𝐷𝐵 = ×2
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

Where:
depreciation rate = 1/useful life
 (depreciation method)

Residual Value is not used in the calculation of

annual depreciation until the last year.

An asset should not be depreciated below its

residual value.
Suppose a business has bought a
machine for Php100,000. They have
estimated the useful life of the machine
to be 8 years with a salvage value of
Php11,000.
Given:
 Cost of the asset = 100,000
 Salvage Value = 11,000
 The useful life of the asset = 8 years
 Depreciation rate = 1/useful life *100 = (1/8) * 100 = 12.5%

Here, it will be 2 x 12.5% = 25%

• Year 1 Depreciation = 100000 X 25% = 25,000

• Year 2 Depreciation = 75,000 x 25% = 18,750
 BOOK VALUE BOOK VALUE
YEAR Depreciation
(Beginning Year) (Ending Year)
1 100,000 25,000 75,000
2 75,000 18,750 56,250
3 56,250 14,063 42,188
4 42,188 10,547 31,641
5 31,641 7,910 23,730
6 23,730 5,933 17,798
7 17,798 4,449 13,348
8 13,348 2,348 11,000
An asset should not be depreciated below its residual value.
You purchased an equipment for Php250,000.
This equipment has a 5 year life and an
Php20,000 residual value. Calculate
depreciation for each of the five years using
the declining balance method.

Prepare the Double declining depreciation

schedule.
 BOOK VALUE BOOK VALUE
YEAR Depreciation
(Beginning Year) (Ending Year)

1 250,000 100,000 150,000

2 150,000 60,000 90,000
3 90,000 36,000 54,000
4 54,000 21,600 32,400
5 32,400 12,400 20000
YEAR BOOK VALUE Depreciation BOOK VALUE
(Beginning Year) (Ending Year)

1 100,000 40,000 60,000

2 60,000 24,000 36,000
3 36,000 14,400 21,600
4 21,600 8,640 12,960
5 12,960 4,960 8000
 BOOK
BOOK VALUE
VALUE
YEAR (Beginning Depreciation
(Ending
Year)
Year)
1 70,000 28,000 42,000
2 42,000 16,800 25,200
3 25,200 10,080 15,120
4 15,120 6,048 9,072
5 9,072 1,072 8000
Company F purchased a machine that cost
Php50,000 and will last 5 years. A salvage
value was not assigned to the asset.
Determine the annual depreciation expense
using the declining balance method and
prepare the journal entry to record the
expense.