Financial Management & Digital Accounting · Intermediate level

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

  1. Calculate depreciation for three assets.
  2. Identify accruals and prepayments.
  3. Adjust the income statement.
  4. 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

  1. Give the straight-line depreciation formula.

    Show answer

    (Cost − resale value) ÷ useful life in years.

  2. 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.