In this section I'll walk you through the efficient accounting principle and journal entries by example. So let's assume the cost of an asset is $3,000. useful life is five years and salvage value is 5000. We'll be assuming straight on method. In this example, as accounting entries in any method would remain same as our contract principle our same after we have put this asset to use, first entry at end of year one or end of month would be depreciated expenditure rehabilitate with $9,000. Here the entries for entire year so the appreciation for the first year is $9,000.

As we've seen in our previous example, straight run methods, the same amount of depreciation each year, assuming that we're going to pause this entry 10 of the year, I'm going to be using yearly figure but the entry for month end would be same as this entry. So that precision expenditure for the year is $9,000, which is debited to your p&l account. An accumulated depreciation account is credited as we understand what is accumulated depreciation in previous section of this course. So, it will be credited to balance sheet as a reduction from fixed assets. Now, at end of useful life of this assets, we have to dispose of this asset and close the fixed asset ledger and also accumulate definition ledger. So, as you see the total depreciation for five years would be 45,000 since we have a salvage value of $5,000.

So, accumulated depreciation account since it is a credit to asset account, we have to debit the account to close the same accumulated depreciation account will be debited cash in bank would be our salvage value. Since we have assumed that our asset would be sold for $5,000 we have confirmed that we're going to receive that much amount if you're going to dispose of the asset at the end of its useful life. So $5,000 would be our income and it will be in form of bank or cash so that we are to debit and credit the asset cost account which is $50,000. So in this example, salary value means the minimum value feature and again at the end of the useful life of the asset, the same amount would be our book value. So, in this case there would be no profit or loss. What is the generality if you sold this asset for a profit, suppose it ends up is useful life that is five years, he has sold his asset for a value of $10,000.

So, in this case we are to debit accumulated depreciation account with $45,000 which is depreciation for five years, we also to debit bank or cash which is $10,000 as we have sold for $10,000 here to credit asset account, which is the main cost of the asset $50,000. And we have to credit profit in our income statement with $5,000. Why $5,000 because our book value is $5,000. So, anything above our book value is a profit. What if the asset is sold at a loss? Suppose you're selling this asset for some reason at the end of year three.

So, in this case, we'll be debiting accumulated depreciation account with $27,000 which is nothing but Three years depreciation your one year two year 300,000 into three. Now, we have to debate whatever we have received from the realization of this assets, which is $10,000. And that would be loss on sale of this asset because the asset still has a book value and we have received less than the book value of the asset which is $13,000 and we are to credit asset account with actual cost which is $15,000. How the loss is calculated here in this example is $50,000 the cost of our asset you would minus the depreciation which accumulated at end of year three which is $27,000. So, the total remaining value would be $23,000 you to minus the utilization of the asset which is $10,000. The remaining value would be $30,000 and loss, while all the deposition formula include salvage value in the calculation of depreciation per month per year, solid value is difficult to estimate for any asset interaction Typical work scenario, I'll be ignoring the same in next section where I'll be demonstrating you depreciation calculation with the pro depreciation model in MS Excel.

Very few assume salvage value to be zero at beginning of the year when you acquire the asset. At the end of the useful life of asset you can always creditor enter realization from the assets sold to your p&l which is simpler version rather than assuming a salvage value which is very difficult to estimate in the first place. The next section will be going through the pro depreciation template which I have created from scratch in Microsoft Excel. Thank you for watching.