Start typing, then use the up and down arrows to select an option from the list. # Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

3. Accrual Accounting Concepts

We expense the cost of a Long-Term Asset, such as Machinery, over its useful life. This is called depreciation of the asset's value. We dive much deeper into the concept of depreciation in later chapters, but this is a good time to understand the basics.

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Adjusting Journal Entries: Depreciation (First Year) 8m
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Adjusting Journal Entries: Depreciation (Second Year) 2m
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Alright, so now let's consider the following year, right? In the following year, there's gonna be more depreciation, right? So we talked about, we bought the machine january 1st 2000 that year went by, and now we're talking about the year 2001. Right now it's the end of 2001. So the second year has also expired. Okay, So the company records depreciation Again, we already calculated our depreciation expense. It's that 50,000 we paid for it My divided by the 10 years. It's that 5000 per year, right? So we're gonna make the same entry we made the year before depreciation expense, right? Because now it's 2001, the whole year has gone by. So we've used up another 5000 of the machine, and we're going to credit accumulated depreciation for 5000. Okay? So notice we've credited accumulated depreciation twice. Now. This depreciation expense, the expense each year resets. So remember, it's an income statement account, the expenses every year we're gonna start over with the expenses and re accumulate them. But the accumulated depreciation, it's on the balance sheet, so it's gonna stay there year over year and it's gonna keep amassing a bigger balance. Okay, so notice that our accumulated depreciation, it had a balance of 5000 from previous year, but now we're adding another 5000. So the accumulated depreciation is now sitting at a \$10,000 balance. So the netbook value, it's gonna be that 50,000 that we paid for it minus 10,000 this time, right? Because two years have gone by, we have two years of depreciation accumulated, and it brings that netbook value down to 40,000. So you can imagine as time continues that accumulated depreciation is gonna keep increasing 15,000, 20,000, 30,000, Right? And that's gonna keep decreasing the net book value. Alright, let's stop here and then move on to these practice questions. All right, let's do it now.
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Problem

On January 1, Super Car Wash purchases a brand new auto-washing machine on account for \$40,000. The company expects the machine to last eight years. The company chose the “straight-line” method to depreciate the asset, expecting no salvage value. The adjusting entry at the end of the first year would include:

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What will be the book value of the asset after two years?

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On January 1, 1989 XYX Company purchased a machine for \$180,000 in cash. The company estimated a nine year useful life with no salvage value. After the correct entries are made, what will be the balance in the Accumulated Depreciation account on December 31, 1992? 