Basic accounting questions

[Myrrhman]

I'm an accounting student that works as an accounting assistant, and I got some doubts regarding account payables and depreciation.

My account payable doubt comes from these 2 scenarios: what if you're paying off a bill from the current month? Let's say you got the bill right away, and wrote the check that same day. Would it be wise to register Expense on debit directly against debit on Bank? What if you it's an account payable you didn't register last month, and you're paying it on the current month, would it be wise to register Expense on debit directly against Bank?

I think the proper way should be Expense on debit and Account Payable on credit when recognizing the Account Payable, obviously Account Payable on debit and Bank on credit when paying it off, even if it's something you didn't register when you had to (months ago) or even if it's something you got right away. I think this is the proper way because you will lose control of your accounts payable if you register the expense directly against bank, if you want to check the account payable of any provider then there will be transactions missing from the general ledger because you registered the expense directly against the bank. Am I correct or am I wrong?

Regarding depreciation, let's say we have a building worth 100,000 that we're going to depreciate in 10 years with the straight line method. We're on our sixth year, we've already depreciated 60,000, and the company decides to build an extra floor worth 20,000. How do I depreciate this? Do I just add up the 20,000 and depreciate it for the remaining 4 years? Do I depreciate the new floor separately on a different time frame, let's say another 10 years?

Thanks a lot for your advice. I feel like these are dumb questions, and I'm too ashamed to ask them to my boss or in class.

 

[Counterofbeans]

My account payable doubt comes from these 2 scenarios: what if you're paying off a bill from the current month? Let's say you got the bill right away, and wrote the check that same day. Would it be wise to register Expense on debit directly against debit on Bank? What if you it's an account payable you didn't register last month, and you're paying it on the current month, would it be wise to register Expense on debit directly against Bank?

I think the proper way should be Expense on debit and Account Payable on credit when recognizing the Account Payable, obviously Account Payable on debit and Bank on credit when paying it off, even if it's something you didn't register when you had to (months ago) or even if it's something you got right away. I think this is the proper way because you will lose control of your accounts payable if you register the expense directly against bank, if you want to check the account payable of any provider then there will be transactions missing from the general ledger because you registered the expense directly against the bank. Am I correct or am I wrong?

Cash basis or accrual basis?

If accrual basis, you will want to debit expense and credit AP on the date the goods/services received.

Regardless of basis, I don't understand how you could ever cut a check without going through A/P. Even if it was a manual check, you'd still want to input it into the system in order to track it...

Regarding depreciation, let's say we have a building worth 100,000 that we're going to depreciate in 10 years with the straight line method. We're on our sixth year, we've already depreciated 60,000, and the company decides to build an extra floor worth 20,000. How do I depreciate this? Do I just add up the 20,000 and depreciate it for the remaining 4 years? Do I depreciate the new floor separately on a different time frame, let's say another 10 years?

First question is whether the building is owned or leased. If leased, depreciate over the remaining 4 years. If owned, and you really expect the floor to last > 4 years, then I'd say you have an issue with the estimate of your remaining useful life of your building, for the floor can't have a useful life of > 4 years if you have to move out of the building after 4 years.

 

[bklynboy]

I am assuming he owns the building since he can't depreciate a leased building - only improvements made to the leased property and he is also adding a floor to the building. I think he is saying his initial estimate was the building would last 10 years and toward the end of the life he improves the property by adding a floor. The new floor can go beyond the 4 years remaining since this is an improvement that will outlast the original estimate. For instance, lets assume its 50 years later and the buidling is fully depreciated. I now make improvements to the property (build a new floor). This can be capitalized and depreciated over a useful life regardless of how the original building was depreciated.

In other words, useful life estimates are separately determined.

Finally, for leases its depreciated over the lower of lease term or useful life but the lease term may include renewable options that can extend teh lease beyond the initial lease term. CouterofBeans is correct that if this is a lease that expires in 4 years, generally it should be limited to the lease term.

 

[Counterofbeans]

Yes, useful lives are separately determined, but, in the example above, not only is the building not fully depreciated, but it simply fails to pass the logic test that the floor could be depreciated past the date of the building that the floor is located in.

In other words, if he's going to argue that the floor has a useful life of, say, 20 years, then the estimate of the remaining life of the building needs to also be at least 20 years, if not longer. As such, the NBV of the building (i.e. $40,000 remaining) should be depreciated over 20 years (at least) and not 4 years. This would be a change in estimate on the building's remaining useful life.

If the building is fully depreciated, you can't go back and adjust, so then you just depreciate the floor on it's useful life, as long as that isn't longer than how long you expect to be in the related building.

And you can't extend the useful life of the floor unless it can be shown that renewal of the lease will be likely, as in it has a bargain renewal option, a penalty for not renewing or something similar.

 

[Myrrhman]

Ok everything clear in the thread so far, thanks a lot.

Now, I got another questions regarding depreciation.

Let's say we have a $10,000 machine that has an useful life of 10 years, so we're going to depreciate it with the straight line method for the next 10 years.

So, we're on our ninth year, the accumulated depreciation of the machine is $9,000 , let's say a vital piece of the machine that rarely gets broken starts giving trouble and you have to replace it. We replace the troublesome piece with a new piece worth $2,000, and according to the IAS 16 you can capitalize this because it prolongs the useful life of the machine.

What would be the correct registry of this transaction? 2,000 debit on PP&E and 2,000 credit or bank? Would I have to depreciate this new piece separately?

What if we have the same scenario, and your vital piece gets broken after the second year (for the sake of the argument, let's say there's no warranty). Now, you either buy the piece, of the machine won't work. So, we buy the piece, do we follow up with the next 7 years, or do I depreciate the piece separately? In the end we would be depreciating the machine in 10 years.

My problem is, I know how to depreciate a PP&E, but I get confused when depreciating a PP&E after you capitalize something, like an improvement, or an important piece, like an engine.

 

[Counterofbeans]

Let's say we have a $10,000 machine that has an useful life of 10 years, so we're going to depreciate it with the straight line method for the next 10 years.

So, we're on our ninth year, the accumulated depreciation of the machine is $9,000 , let's say a vital piece of the machine that rarely gets broken starts giving trouble and you have to replace it. We replace the troublesome piece with a new piece worth $2,000, and according to the IAS 16 you can capitalize this because it prolongs the useful life of the machine.

What would be the correct registry of this transaction? 2,000 debit on PP&E and 2,000 credit or bank? Would I have to depreciate this new piece separately?

Technically, the Dr should go to accumulated depreciation, but seldom does anyone do that. Go ahead and capitalize a new asset and depreciate it on its own and you'll be fine

What if we have the same scenario, and your vital piece gets broken after the second year (for the sake of the argument, let's say there's no warranty). Now, you either buy the piece, of the machine won't work. So, we buy the piece, do we follow up with the next 7 years, or do I depreciate the piece separately? In the end we would be depreciating the machine in 10 years.

Expense it as repairs and maintenance, as it didn't extend the useful life, nor productivity of the asset