Understanding the Methods of

Booking Capital Equipment

Presented by:
Ayan Saeed
Sec K
 Depreciation
Based on the accounting principle that assets
lose value as they age

Purpose
To match the expense associated with the item
with the revenue that is generated from it

The cost for capital equipment needs to be

spread over multiple years using depreciation
 Useful Lives
For each item that is above a threshold set by the
company, a determination is made on how long the
building or equipment will be of use to the company

If that “useful life” is greater than one year, it is

expected that the company will depreciate the item

The item is then classified as a capital asset,

asset and
placed in the long term assets section of the
balance sheet of the company
 Salvage Value
The estimated value of an asset at the end of its
useful life

This estimate must be done before the

depreciation of the item

Example: if an asset is acquired for $10,000, but it is

expected that the item can be sold or has a scrap value
of $1,000, the amount to be depreciated is $9,000
Straight Line Method of Depreciation

The same amount of depreciation is allocated to each year of

the asset’s useful life

Example: If an asset is acquired of $10,000, its scrap value is

$1000, and the useful life is 10 years, $900 would be
allocated to each year as Depreciation ($9,000 depreciable
value divided by 10 years)

This easy method assumes that the asset loses its value as
time goes by

Assets are not revalued, and gains and losses on the asset
are not recognized until the asset is sold or scrapped
 Accelerated Depreciation

In reality, building and equipment do not lose value in a

straight line. Most commonly, items have a greater
loss of value in the first years of use

Accountants that use accelerated depreciation record

more depreciation in the early years of an asset’s
useful life

Some methods accelerated depreciation: double

declining balance and sum of the years digits
 Accounting for Depreciation
On the books of the company, the value of a capital asset does not
change over time. A separate line on the balance sheet is created
associated with the asset called ‘accumulated depreciation’.

 Entry for the first year of the example

Debit Equipment $10,000
Credit Cash $10,000

Depreciation Expense $900

Accumulated Depreciation $900

After the end of first year, by combining the accounts above, the accountant
can determine that the undepreciated value, or net book value of the asset is
$9,100