From the course: Advanced Bookkeeping Techniques
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End-of-period estimates such as depreciation and bad debts
From the course: Advanced Bookkeeping Techniques
End-of-period estimates such as depreciation and bad debts
- Computing accrual-based as net income requires the estimate of many expenses. Three examples are depreciation expense, bad debt expense, and environmental cleanup expense. Depreciation expense is the accountant's estimate of how much of the cost of long-term assets, such as buildings and equipment, was used this year. For example, assume that a company buys a machine for $10,000. The machine is expected to be used in operations for 10 years, after which, it will be worthless. The matching principle says that expenses should be reported this year for all the costs associated with generating this year's revenues. Well, the use of the machine certainly helped generate revenues this year. How much expense should be reported? A simple and common sense estimate is to assume that the machine will be used up evenly over the 10 years. Cost of $10,000 evenly used up for 10 years means that depreciation expense for this year is…
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