The depreciation reported on the income statement is the amount of depreciation expense that is appropriate for the period of time indicated in the heading of the income statement.

Using our example, the monthly income statements will report Rs.1,000 of depreciation expense. The quarterly income statements will report Rs.3,000 of depreciation expense, and the annual income statements will report Rs.12,000 of depreciation expense. Each month Rs.1,000 of depreciation expense is being matched to the 120 monthly income statements during which the displays are used to generate sales revenues.

2. Depreciation on the balance sheet

Using our example, after one month of use the accumulated depreciation for the displays will be Rs.1,000. After 24 months of use, the accumulated depreciation reported on the balance sheet will be Rs.24,000. After 120 months, the accumulated depreciation reported on the balance sheet will be Rs.120,000. At that point, the depreciation will stop since the displays' cost of Rs.120,000 has been fully depreciated. If the displays continue to be used in the 11th year, there will be no depreciation expense in the 11th year and the accumulated depreciation will continue to be Rs.120,000.

How do we calculate depreciation using the sum of the years' digits?

Example:

The next step is to sum (add) up the digits in the five years of the asset's useful life: 1 + 2 + 3 + 4 + 5 = 15. The "15" will be the denominator for the fractions 5/15, 4/15, 3/15, etc. In the first year of the asset's life, 5/15 of the \Rs.1,50,000 or Rs.50,000 will be debited to Depreciation Expense and Rs.50,000 will be credited to Accumulated Depreciation.

In the second year of the asset's life, the depreciation amount will be Rs.40,000 (4/15 of Rs.1,50,000). The third year the depreciation will be Rs.30,000 (3/15 of Rs.150,000). The fourth year depreciation will be Rs.20,000 (2/15 of Rs.1,50,000). In the fifth year of the asset's life, the depreciation will be Rs.10,000 (1/15 of Rs.1,50,000). Remember that in this example, the total amount of depreciation during the asset's useful life needs to add up to Rs.1,50,000.

Instead of adding the individual digits in the years of the asset's useful life, the following formula can be used to compute the sum of the digits: n(n+1) divided by 2, where n = the useful life in years. Using this formula for our example, we have: 5(5+1)/2 = 5(6)/2 = 30/2 = 15. [If the formula is used for an asset having a useful life of 10 years, the digits will sum to the following: 10(10+1)/2 = 10(11)/2 = 110/2 = 55. In the first year of this asset's useful life, the depreciation will be 10/55 of the amount to be depreciated. The second year will use 9/55 and the tenth year will use 1/55.]

What is the accounting treatment for an asset that is fully depreciated, but continues to be used in a business?

Example:

Remove equipment that is sold before it is fully depreciated.

• Record the depreciation expense right up to the date of the disposal
• Remove the equipment's cost and the up-to-date accumulated depreciation, record the cash received, and record the resulting gain or loss

The first step requires a journal entry that:

• Debits Depreciation Expense (for the depreciation up to the date of the disposal)
• Credits Accumulated Depreciation (for the depreciation up to the date of the disposal)

The second step requires another journal entry to:

• Credit the account Equipment (to remove the equipment's cost)
• Debit Accumulated Depreciation (to remove the equipment's up-to-date accumulated depreciation)
• Debit Cash for the amount received
• Get this journal entry to balance. If a debit amount is needed (because the cash received was less than the equipment's book value), record a debit to Loss on Disposal of Equipment. If a credit amount is needed (because the cash received was greater than the equipment's book value, record a credit to Gain on Disposal of Equipment.
  

Is depreciation a source of funds?

Depreciation expense was added to the net income because the depreciation expense had reduced net income but cash was not reduced. In other words, the positive Rs.8,000 of depreciation expense is not a source of cash, it is merely a needed adjustment to convert the accrual net income to the cash provided from the florist's operating activities.

While the amount of depreciation expense is not a source of cash, it does reduce a corporation's taxable income. That in turn reduces a profitable corporation's cash payments for income taxes (by the amount of the corporation's income tax rate). The savings of income tax payments is equivalent to a source of cash.

Yes, many companies use two or more methods of depreciation.

It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return.

A company could also be depreciating its equipment over ten years for its financial statements, while using seven years for its income tax return.

Even the depreciation for financial statements could consist of some assets being depreciated using the units of production or units of activity method, while other assets are depreciated using the straight line method.

Can a fully depreciated asset be revalued?

Example: