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Depreciation

11–4 Simply Accounting

Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM.

Confidential ACCPAC International

We set up an account on the balance sheet called Allowance for

Doubtful Accounts which is then subtracted from Accounts

Receivable on the balance sheet, like this:

Current Assets

Accounts Receivable 38,000

Less: Allowance for Doubtful Accounts 2,000

Net Accounts Receivable 36,000

The Allowance for Doubtful Accounts has a credit balance,

which is what we expect since it is subtracted from Accounts

Receivable.

Since revenue of $2,000 was recorded when the contract was

completed, income must be reduced by $2,000 since National

may never receive the money owed from the contract. Rather

than simply reduce one of the revenue accounts by $2,000, we

create an expense account called Bad Debts since the problem

wasn't earning the money, it was collecting it.

The adjusting entry to record this is:

Jan 31,

96

Bad Debt Expense

Allowance for Doubtful Accounts

Invoice #1387 likely uncollectable

5120

1210

2,000

2,000

Depreciation

Equipment deteriorates during use and therefore loses value

each year. Part of the cost of the equipment should be allocated

as an expense to each year's operation benefiting from its use.

This allocation of the cost of a piece of equipment over its useful

life is called depreciation.

Brown determines a fair allocation of the cost of his equipment

over its useful life and determines these depreciation figures for

the year ended January 31, 1996: Trucks – $8,000; Construction

Equipment – $5,000; and Buildings – $4,000.