Depreciation

Suppose we bought a truck to deliver our product. The truck cost us $30,000 and we estimate that we will use it for 3 years before it becomes too expensive to keep it going .We futher estimate that at the end of the three years we will be able to sell it for $3.000 . This $3.000 is the estimate salvage ( also termed the residual value)

.Accumulated Description is an enimatic account for many studens .It is a violation account. It is also a contra account.Now let's see what it really is . The truck account will remain $30.000 ,until we sell or trade in the truck . The amount of depreciation we take on the truck will accumulate over the years we own it in the accumulated Depreciation account . The cost minus the accumulated depreciation of any fixed asset is know as its book calue .consider the P and L and the balance sheet for each of the following years:

P&L Year 1 Year 2 Year 3

Sales

Cost of Good Sold

Gross Margin

Operating Expenses:

Xxxxx Expense

Xxxxx Expense

Depreciation Expense 9,000 9,000 9,000

Balance Sheet

Current Assets

Xxxxxxx

Xxxxxxx

Xxxxxxx

Total Current Assets

Fixed Assets

Truck 30,000 30,000 30,000

Less Accumulated

Depreciation (9,000) (18,000) (27,000)

IF we originally purchased the truck at a point in the years other than the beginning , we would adjust our depreciation for the period we used it .Many companies have special rules for these situation.A common one is that the company takes 1/2 of a year depreciation in the year they buy the asset ,no matter when in the year that occurs ,and they take 1/2 of a year they sell the asset .again no matter when in the year that occurs