Accounting and Finance for Lawyers

Fixed Asset

Fixed assets are assets that will be used for more than one year.

Such assets should be depreciated to better reflect their expense.

Depreciation

Depreciation is allocating the upfront cost of an asset over multiple years to better match its cost of the asset against when its benefit is acquired. This is basically consuming the asset through wear and tear.

Depreciation goes from the historical cost to the scrap value over the asset's expected useful life.

Delivery, installation, and improvement costs are included in an asset's historical cost amount.

Scrap value is what the asset can be sold for at the end of its useful life.

Depreciation must be accounted in contra accounts to avoid messing up the historical costs of assets on the balance sheet.

Contra Account

A contra account is an account that keeps track of the depreciation or bad debt expense that accumulates for an asset.

A credit to a contra account essentially decreases the value of the opposed asset while keeping the original value.

Example
 Account Debit Credit Equipment 10000 Cash 10000 Depreciation Expense 2000 Accumulated Depreciation 2000 Cash 9000 Accumulated Depreciation 2000 Equipment 10000 Gain on Sale 1000

On the balance sheet, the accumulated depreciation will be listed below the fixed assets, and the resultant book value under that.

 Account Amount Equipment 9000 Accumulated Depreciation 1000 Book Value 9000
Straight Line Method$\mathrm{DepreciationExpense}=\frac{\mathrm{Cost}-\mathrm{Scrap Value}}{Useful Life}$
Sum of the Years' Digits Method

SYD depreciation multiplies the cost minus the scrap value by a fraction based on the years.

Example Fractions Over Five Years $5+4+3+2+1=\mathrm{15}$
• Year 1: $\frac{5}{15}$
• Year 2: $\frac{4}{15}$
• Year 3: $\frac{3}{15}$
• Year 4: $\frac{2}{15}$
• Year 5: $\frac{1}{15}$
Double Declining Method

The double declining method depreciates by taking the percent of the useful life the year is, doubling it, and multiplying it by the opening balance.

• Note that unlike the others, scrap value does not change this depreciation every year. It just cannot depreciate it below such value.
Example
Year Historical Cost Opening Balance Depreciation Expense (20%) Accumulated Depreciation Book Value
1 \$100,000 \$100,000\$20,000\$20,000\$80,000
2 \$100,000 \$80,000\$16,000\$36,000\$64,000
3 \$100,000 \$64,000\$12,800\$48,800\$51,200
4 \$100,000 \$51,200\$10,240\$59,040\$40,960
5 \$100,000 \$40,960\$8,192\$67,232\$32,768
6 \$100,000 \$32,768\$6,554\$73,786\$26,214
7 \$100,000 \$26,214\$5,243\$79,028\$20,972
8 \$100,000 \$20,972\$972\$80,000\$20,000
9 \$100,000 \$20,000\$0\$80,000\$20,000
10 \$100,000 \$20,000\$0\$80,000\$20,000