Intermediate level · Module 1: Balance Sheets and Cash Flow Statements · Lesson 2 of 3
Depreciation and Accruals
Match costs to the periods that use them.
In this lesson you will
- Calculate straight-line depreciation
- Record accrued and prepaid expenses
Key concepts
depreciationuseful lifeaccrualsprepayments
The lesson
Equipment is used for several years, so its cost is spread over its useful life as depreciation. Straight-line: (cost − expected resale value) ÷ years. A 2,400,000 SSP generator expected to last four years with no resale value is depreciated by 600,000 SSP a year.
Accruals record expenses used but not yet billed, such as electricity for the last weeks of the month. Prepayments record payments made in advance, such as a year's rent paid in January.
These adjustments make profit reflect the period's real costs.
Step by step
- Calculate depreciation for three assets.
- Identify accruals and prepayments.
- Adjust the income statement.
- Update the balance sheet.
Practice activity
Make the month-end adjustments for the business.
Expected result: Adjusted statements with depreciation, accruals and prepayments.
Check your understanding
-
Give the straight-line depreciation formula.
Show answer
(Cost − resale value) ÷ useful life in years.
-
What is an accrual?
Show answer
An expense used in the period but not yet billed or paid.
Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.