Adjusting Entries | Part 2
Depreciation & Bad Debts

Module 1:
Foundations of Accounting

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Explain the concept of depreciation.

➛ Calculate depreciation using the Straight-Line method.

➛ Record depreciation adjusting entries.

➛ Understand bad debts and why they occur.

➛ Record bad debt expense using the Allowance Method.

➛ Understand the effect of depreciation and bad debts on financial statements.

➛ Depreciation
➛ Straight-Line Method
➛ Accumulated Depreciation
➛ Bad Debts
➛ Allowance for Doubtful Accounts
➛ Contra Asset
➛ Net Book Value

Assets lose value over time due to use, wear, or obsolescence

Depreciation
➛ Is an expense
➛ Does not involve cash
➛ Matches asset cost with revenue earned

➛ Some customers will not pay
➛ We estimate bad debts before they occur
➛ Required by GAAP/IFRS

Calculate annual depreciation

➛ Equipment cost $10,000, useful life 5 years, residual value $0
➛ Vehicle cost $18,000, useful life 6 years, residual value $3,000
➛ Furniture cost $9,000, useful life 3 years, residual value $0

Prepare the adjusting entry for one year for each asset in Activity 1.

State whether each account is an Expense, Asset, Contra Asset, or Liability

➛ Depreciation Expense
➛ Accumulated Depreciation
➛ Accounts Receivable
➛ Allowance for Doubtful Accounts
➛ Bad Debts Expense

Accounts Receivable balance = $20,000
Estimated bad debts = 5%

1. Calculate bad debts expense
2. Prepare the adjusting journal entry

A company owns machinery costing $25,000, residual value $5,000, useful life 4 years.

➛ Accounts Receivable = $40,000
➛ Estimated uncollectible receivables = 4%

Questions

➛ Calculate annual depreciation.
➛ Prepare depreciation adjusting entry.
➛ Calculate bad debts expense.
➛ Prepare bad debts adjusting entry.
➛ Show how machinery appears on the Balance Sheet after one year.

➛ Is depreciation a cash expense?

➛ What account accumulates depreciation over time?

➛ Which method spreads cost evenly?

➛ Why do we estimate bad debts?

➛ Which account reduces Accounts Receivable?

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Answers ➧ Here

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Module 2 ➧ Here