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The Adjusting Process

The Adjusting Process. LO 2d – Recording Depreciation of Fixed Assets. LO 2. Adjusting Entries. LO 2. Depreciation Expense. Fixed assets , or plant assets , are physical resources that are owned and used by a business and are permanent or have a long life.

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The Adjusting Process

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  1. The Adjusting Process LO 2d – Recording Depreciation of Fixed Assets

  2. LO 2 Adjusting Entries

  3. LO 2 Depreciation Expense • Fixed assets, orplant assets, are physical resources that are owned and used by a business and are permanent or have a long life. • As time passes, a fixed asset loses its ability to provide useful services. This decrease in usefulness is called depreciation.

  4. LO 2 Depreciation Expense • All fixed assets, except land, lose their usefulness and , thus, are said to depreciate. • As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This periodic expense is called depreciation expense.

  5. LO 2 Depreciation Expense • The fixed asset account is not decreased (credited) when making the related adjusting entry. This is because both the original cost of a fixed asset and the depreciation recorded since its purchase are reported on the balance sheet. Instead, an account entitled Accumulated Depreciation is increased (credited).

  6. LO 2 Depreciation Expense • Accumulated depreciation accounts are called contra accounts, or contra assetaccounts.

  7. LO 2 Depreciation Expense • Normal titles for fixed asset accounts and their related contra asset accounts are:

  8. LO 2 Depreciation Expense NetSolutions estimates the depreciation on its office equipment to be $50 for the month of December.

  9. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 2 Depreciation Expense increase increase

  10. LO 2 Depreciation Expense • The difference between the original cost of the office equipment and the balance in the Accumulated Depreciation—Office Equipment account is called the book value of the asset (or net book value). It is computed as shown below. Book Value of Asset = Cost of the Asset – Accumulated Depreciation of Asset Book Value of Off. Equip. = Cost of Off. Equip. – Accum. Depre. of Office Equip. Book Value of Off. Equip. = $1,800 – $50 Book Value of Off. Equip. = $1,750

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