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13.4A Why is depreciation an Expense?

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Unit 3 VCE Accounting.

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13.4A Why is depreciation an Expense?

  1. 1. 13.4a WHY IS DEPRECIATION AN EXPENSE?
  2. 2. © Michael Allison. Author’s permission required for external use. 13.4a WHY IS DEPRECIATION AN EXPENSE? Depreciation represents an Expense for the firm which lowers profit… Definition: Expenses are: • Outflows of economic benefits or reductions in inflows of economic benefits • That will either: •  Assets • Liabilities • With the ultimate effect of: •  Owner’s Equity
  3. 3. © Michael Allison. Author’s permission required for external use. 13.4a WHY IS DEPRECIATION AN EXPENSE? Example: depreciation of $2,000 for a car was charged this period. Debit Credit Negative Asset   Accumulated Depreciation [-A]Accumulated Depreciation [-A] 31/12 Depn– Car 2000 Debit Credit Negative Asset   Depreciation [E] Debit Credit Expenses   Depreciation [E] 31/12 Acc. Depn – Car 2000 Debit Credit Expenses   Trait #1 Trait #2 Trait #3 Depreciation • There is a consumption (usage) of economic benefits • The asset has been used (driven) this period  Assets (Acc Dep will  the Car Asset)  Owner’s Equity
  4. 4. © Michael Allison. Author’s permission required for external use. Depreciation represents an Expense for the firm which lowers profit… 13.4a WHY IS DEPRECIATION AN EXPENSE? Wages paid Depreciation Characteristic #1 • There is a consumption (usage) of economic benefits • The labour of employees has been used during the period • There is a consumption (usage) of economic benefits • The asset has been used (driven) this period Characteristic #2  Assets (the Cash Asset)  Assets (Acc Dep will  the Car Asset) Characteristic #3  Owner’s Equity  Owner’s Equity
  5. 5. © Michael Allison. Author’s permission required for external use. TASK In-class Homework SQ1 X SQ2 X

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