Reporting Depreciation on the Balance Sheet

Reporting Depreciation on the Balance Sheet
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  • 0:02 A Company Asset
  • 0:58 Deprciation
  • 2:05 On the Balance Sheet
  • 2:55 On the Income Statement
  • 3:54 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this video lesson, we talk about how to report depreciation on the balance sheet versus the income statement. Learn why the numbers may be different.

A Company Asset

You own a landscaping company where people come to you to design their yards. You have the experience and the creative talent to design the best-looking yards anyone has ever seen. You have received many top landscaper awards over the years and have a waiting list of customers. You are certainly not hurting for money. Because the company is so successful, you have a number of company assets, equipment that is used in business.

Part of your assets include a rather large fleet of landscaper trucks. You purchased the top of the line of trucks for your company and had your company logo and information painted on the trucks. You purchased these trucks for $60,000 each. You are planning on keeping these trucks for their whole life expectancy of 10 years. You know though, as the trucks age and as you use them, they begin to lose value. Each year they lose a bit more money and their value drops.

Depreciation

As part of your financial reporting, you report this drop in value as your depreciation. The easiest method to report your depreciation is called the straight-line depreciation method. This method divides the cost of your truck by the number of years it is expected to be used (life expectancy). This number then gives you your annual depreciation.

To calculate the monthly depreciation, you then divide the annual depreciation by 12, the number of months in a year. So, our trucks have a yearly depreciation of $60,000/10 or $6,000. Each month, the depreciation is $500. This means that each month, the truck's value drops by $500 and each year the truck's value drops by $6,000. So, in Year 2, the value of the truck is $60,000 - $6,000 or $54,000. Year 3, the truck's value is $54,000 - $6,000 or $48,000.

On the Balance Sheet

As part of accurate reporting and financial bookkeeping, you report the depreciation in two places. The first place is in the balance sheet, the statement of what the company owns and owes. The balance sheet gives an overview of what the company is worth and what kind of debt the company is in.

As far as our depreciation is concerned, the balance sheet gives you the total depreciation you have taken so far. So, the depreciation for one truck for Year 1 of owning the truck is $6,000. For Year 2, the depreciation will show $12,000, the total depreciation taken after two years. For example, if you purchased the truck in 2014, the depreciation will be $6,000 in 2015 and $12,000 in 2016.

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