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Mini-Video D - Accounting 1 - Chapter 3 - Why Do We Use A Contra-Asset Account For Fixed Assets? - YouTube
Channel: JCCCvideo
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All right, good.
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Questions on B?
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Now I know we have C to go on to but I want
to do something here on this one here, okay?
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What
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I want to do is, find my pen, here it is,
I found it, you can quit looking.
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I got it, okay?
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I want to do a partial balance
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sheet, a partial balance sheet and I want
to show the truck less the accumulated depreciation.
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What does that equal, cost less
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accumulated depreciation?
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-Book value.
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-Book value.
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So what are these amounts at end of year one?
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At the end of year one, this is the entry
we've made, do you see
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where the truck is $44,000 then we subtract
out the accumulated depreciation of $8,800,
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correct?
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And that equals, what does
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that equal?
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$35,200?
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Agreed?
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-I agree.
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-Okay.
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Now, let's say, what would those amounts equal
at the end of year two?
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Well, the truck would still, the cost was
still
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$44,000, correct?
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But now our accumulated depreciation is how
much?
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-$36,400?
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-Well, our accumulated depreciation, that's
how much we depreciate every year, right?
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So after two years we've depreciated
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this amount twice, so $8,800 is $17,600.
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-$17,600, yeah.
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-Does that make sense?
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So what is our new book value?
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I believe it's $26,400, okay?
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Somebody second that?
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-Yes.
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-Is that right?
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-Yes.
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-Okay?
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All right.
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Do you understand what I'm doing here?
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So, now let's fast forward to at end of year
five.
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Now, this is at
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the end of year five and five years is what
we estimated it to last, right?
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Okay.
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So the cost would still be $44,000, correct?
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What would the accumulated depreciation be?
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$8,800 times five which is $44,000.
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So what is the book value?
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-Zero.
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-Zero.
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Now, this is a-- I'm doing this because do
you think the market value of that truck is
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zero at the end of year five?
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-No.
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-Would we just give it away if somebody offered
us a dollar?
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No.
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This is why we use a contra asset in depreciation.
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Now we did
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not with supplies and prepaid insurance, right?
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But with fixed assets, this is what, looking
back at the document camera,
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above the yellow line is what the readers
will see.
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If we would have made these AJE's and credited
truck instead of the contra
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asset of accumulated depreciation truck, here
is what would be showing on our balance sheet.
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Truck, zero.
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Now, which do you
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think gives the reader more information?
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This or this?
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This, right?
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This says, "Hey we have a truck.
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We paid $44,000 for it.
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It's fully depreciated, so the book value
is zero but we do have the truck.
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We're not making any claim to the market value
of
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it but we do have the truck," okay?
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Does that make sense?
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That's why we use a contra asset for fixed
assets and depreciation.
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Now we don't do it for supplies because truly,
if your supplies are zero, then truly, your
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supplies are zero, right?
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If you
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have prepaid insurance and it's all been used
up, it's truly zero but that truck is not
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truly zero, we want to give them more
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information.
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By us just saying truck, zero, little confusing,
isn't it?
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You with me?
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