N O E L A .
B E R G O N I A , C PA , M B A
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Depreciation
❖Depreciation is the accounting process of allocating the cost of
tangible assets to expense in a systematic and rational manner to
those periods expected to benefit from the use of the asset.
❖Reasons for recognizing depreciation of assets:
✓ Usage
Building Machinery
✓ Physical wear and tear
✓ Passage of time Property, Plant and
Equipment
Equipment
Furnitures
Vehicles
& Fixtures
Noel A. Bergonia, CPA, MBA
Depreciation
❖There are three items that we need to consider in depreciating the
assets and they are as follows:
➢ Depreciable Cost/Base of the Asset. It is a function of two function:
✓ Cost
✓ Salvage, scrap, residual or disposal value
➢ Useful life or Service life. It is the amount of use that the company
expects to obtain from the asset before disposing of it. This use can be
expressed in units of time or in units of activity.
➢ Depreciation Method. The objective is to try to allocate cost to the
period in an amount that is proportional to the benefits generated by
the asset during the period relative to the total benefits provided by
the asset during its life.
Noel A. Bergonia, CPA, MBA
Depreciation
❖Depreciation of an asset begins when it is available for use, i.e., when it
is in the location and condition necessary for it to be capable of
operating in the manner intended by management.
❖Depreciation of an asset ceases at the earlier of:
➢ the date that the asset is classified as held for sale (or included in a
disposal group that is classified as held for sale) in accordance with
IFRS 5, and
➢ the date that the asset is derecognized.
❖ Depreciation does not cease when the asset becomes idle or is retired
from active use unless the asset is fully depreciated.
Noel A. Bergonia, CPA, MBA
Journal Entry for Depreciation
Depreciation expense XX
Accumulated Depreciation XX
Depreciation expense is the
portion of the asset’s cost
that is allocated to an Accumulated depreciation (a contra-asset
expense in the current year. account) represents the cumulative amount of
the asset’s cost that has been depreciated in
all prior years including the current year.
Noel A. Bergonia, CPA, MBA
Financial Statement Presentation
Property, Plant and Equipment, net
Cost XX
Accumulated Depreciation (XX)
Book Value/Net Book Value/Carrying Value XX
Noel A. Bergonia, CPA, MBA
Depreciation Methods
❖Time-Based Depreciation Methods
➢ Straight-line method
➢ Sum-of-the-years digit (SYD) method
➢ Double-declining balance method
➢ 150% declining balance method
❖ Activity-Based Depreciation Methods
➢ Units-of-output method
➢ Depreciation based on machine hours.
Noel A. Bergonia, CPA, MBA
Straight-line Method
❖In this method, an equal amount of the depreciable base (or cost base) is
allocated to each year of the asset’s useful life.
❖The depreciable base is simply divided by the number of years in the asset’s life
to determine annual depreciation.
Asset cost - Residual Value
Depreciation expense =
Useful life
Noel A. Bergonia, CPA, MBA
Example 1
The Itaewon Company
purchased a fabricating
equipment on January 1, 2020,
at a net cost of P230,000. At the 2020 to 2023
Dec. 31 Depreciation Expense- Equipment 50,000
end of its four-year useful life, Accumulated Depreciation- Equipment 50,000
the company estimates that the (230,000 – 30,000) ÷ 4
machine will be worth P30,000.
The company’s calendar year
ends on December 31.
Required:
Compute depreciation expense,
accumulated depreciation and book
value for 2020 through 2023 using
straight-line method.
Noel A. Bergonia, CPA, MBA
Example 2
The Gangnam Company 2020
purchased a fabricating Dec. 31 Depreciation Expense- Equipment 37,500
Accumulated Depreciation- Equipment 37,500
equipment on April 1, 2020, at a 50,000 x 9/12 = 37,500
net cost of P230,000. At the end 2021 to 2023
of its four-year useful life, the Dec. 31 Depreciation Expense- Equipment 50,000
Accumulated Depreciation- Equipment 50,000
company estimates that the (230,000 – 30,000) ÷ 4
machine will be worth P30,000. 2024
The company’s calendar year Mar. 31 Depreciation Expense- Equipment 12,500
ends on December 31. Accumulated Depreciation- Equipment 12,500
50,000 x 3/12 = 12,500
Required:
Compute depreciation expense,
accumulated depreciation and book
value for 2020 through 2023 using
straight-line method.
Noel A. Bergonia, CPA, MBA
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Noel A. Bergonia, CPA, MBA
