Depreciation

Depreciation is an exaple of a deferred expense. In this case the cost is deferred over a number of years, rather than a number of months, as in the insurance example above.

In 2000 the company buys a delivery truck for 12,000. They expect the truck to last 5 years. They decide to use the straight line method, with a salvage value (SV) of $2,000. The depreciable value is $10,000 ($12,000 cost - $2,000 SV). The annual depreciation expense is $2,000 ($10,000/ 5 years).

Year>	2001	2002	2003	2004	2005	total
$ spent>	$12,000	$0	$0	$0	$0	$12,000
Expense taken	$2,000	$2,000	$2,000	$2,000	$2,000	$10,000
Salvage Value						$2,000

At the end of 5 years, the company has expensed $10,000 of the total cost. The $2,000 salvage value remains on the books.

General Journal

Date	Account	Debit	Credit
Jan-2	Delivery Trucks	$12,000
	Cash		$12,000
	To record purchase of delivery truck
Dec-31	Depreciation Expense	$2,000
	Accumulated Depreciation		$2,000
	To record depreciation expense for the year

The straight line method is only one method used to calculate depreciation. The subject will be covered more in Chapter 9.

General Ledger
Delivery Trucks

Date	Description	Debit	Credit	Balance
2001	To record purchase of truck	$12,000		$12,000

Accumulated Depreciation

Date	Description	Debit	Credit	Balance
2001	To record annual depreciation		$2,000	$2,000
2002	To record annual depreciation		$2,000	$4,000
2003	To record annual depreciation		$2,000	$6,000
2004	To record annual depreciation		$2,000	$8,000
2005	To record annual depreciation		$2,000	$10,000

Book Value & Salvage Value
Book value is the difference between the cost of an asset, and the related accumulated depreciation for that asset.

Book Value = Cost - Accumulated Depreciation

Book Value = ($12,000 - $10,000) = $2,000

The company will stop depreciating the truck after the end of the fifth year. The truck cost $12,000, but only $10,000 in depreciation expense was taken. The remaining book value is equivalent to the salvage value established when the vehicle was purchased. Book value will be used to calculate any gain or loss when the truck is sold or traded (Chapter 9).