 in that number. Now that we've done the calculation, it may be more clear to see what the journal entry does. What happens on the journal entry if we look at the chart of accounts, what's going to happen? There's going to be two accounts related to it. It's an adjusting entry so we're going to have one account above the owner's equity, meaning a balance sheet account and we're generally going to have one income statement account. And of course the balance sheet account will be depreciation. So the balance sheet account will be accumulated depreciation and the income statement account will be depreciation expense. I have abbreviated of course the accumulated depreciation because it's a quite a long account name. So we know that depreciation expense have debit balances. They generally only go up. We're going to make it go up by doing the same thing to it, which in this case would be another debit. So we know that the debit will be the depreciation expense of in this case the 59, 375 and enter. If I do that it's posting automatically now and it's saying that that's going to be an expense. It brought net income down, meaning that we have income of 100,000 minus the 59, 375 we just posted. That is the sum of the 40,625. That's not a loss. That's income of the 100 minus the 59, 375. We're going to put a credit here. I'm going to represent the credit with a negative number for purposes of this worksheet. So I'm going to say negative of this number and that will post the accumulated depreciation. So if we think about this in terms of the trial balance at this point, we've got the books, we've got the equipment on the books at the cost to 575. That's the cost less the accumulated depreciation. Notice the equipment is an asset with a debit balance. The accumulated depreciation is an asset with a credit balance. And that's unusual because most assets have debit balances. Why is this an asset with a credit balance? Because we're trying to give our reader two different things. We basically broke up the equipment account. We said, hey, here's the equipment account on there at cost. But we have taken it down in value because it's an estimate. We want to tell our reader what the cost is and what the estimated depreciation in value is. Therefore, if we take the debit minus the credit, that would be the full two sides kind of of the empty account that we've kind of broken out between a seven and an R now. So that would mean that the book value is the 198-125. That's the book value 198-125. And of course, the depreciation expense is down here. And that's what we have so far. If we look at the next year, you'll note that the depreciation expense will basically go away as of the next year because we have not yet recorded it. What happens to this depreciation expense? Well, it's an income statement account that is now part of equity. So the depreciation expense has rolled into equity. So all of this is part of equity, which is now one number in the following year. If we happen to make 100,000 again next year, we happen to have the same amount of revenue, then we're going to record the depreciation expense with a similar journal entry. And we'll see what that process looks like next time. If we think about that process in terms of the just a standard calculation of book value, we know that depreciation is the same for year two. The cost is going to be the same. That's what we bought it for. That does not change. What does change is the accumulation of the depreciation. Why? Because we have the year one depreciation now and we have the year two depreciation. So the depreciation expense itself is going to be what it is up here for any given year. The accumulated depreciation is the depreciation expense for the entire time period up to that point, which in this case equals this number plus this number. So that's so we have the year one depreciation plus the year two depreciation or prior years accumulated depreciation plus the current year's depreciation expense. That gives us this number. So now we're up to here. Now what's the new book value? It equals the 257.5 minus the 118.750. Our new book value is 137.5. How can we record that? How can we see that in terms of our accounts on our trial balance? Well, it's the same journal entry. We're going to do the same thing. It's an adjusting entry account. We're going to have the depreciation is going to go up by the 59.375 expense, the depreciation expense. And we're going to credit accumulated depreciation for the same amount. What does that do in year two? Well, we can see that the accumulated depreciation expense went up from 59.375 to 118.750. That's recorded by this entry here. Then the depreciation expense went from zero up to 59.375. That brought net income down. So note that what happens to net income if we had the same sales for the two time periods, we would end up with the same net income. That is income. It's the 100 minus the 59.375. Note that the depreciation expense is the 59.375, but the accumulated depreciation is 118.750. And you might ask, well, how could that be if we're hitting these two accounts equally each time? Why aren't they the same? They should be equal and opposite you would think. And the reason is because these are a temporary account. Remember, this is a temporary account. They got closed out to the equity section and therefore we start over each year. So the second year we started over and went from the bottom up. The permanent account of accumulated depreciation stayed the same and went up. So that's the difference between a permanent account, the temporary account. The income statement needs to start over from a time period, from a time frame of beginning and an end. And the permanent accounts then do not start over in that way. So if we continue this process, then we're now going to go to the next calculation in terms of just a worksheet type of calculation to calculate the book value. Now we have the cost for year three. It's just the same. And how about the accumulated depreciation? Well, we could sum it up this way. It's the depreciation for the three years, the 178.125 or we could say it's the sum of as of last year plus the current year's accumulated depreciation. And that will give us the 178.125. That should bring the book value down. How do we calculate the book value? Well it equals the cost minus the accumulated depreciation as of that time period bringing us to in this case 79.375. What if we do that calculation in terms of a trial balance? We'll do the same. It's the same exact journal entry. We're going to say it's the 59.375 debit to depreciation expense and a credit to accumulated depreciation of 59.375. If we see what happens in year three then, remember before we posted this that the capital account went up by the entire blue section, meaning prior capital account plus the revenue minus the depreciation expense. And then if we're assuming again that we just made revenue of the same amount during this year 100,000 then we have depreciation expense same amount. We recorded this depreciation expense here bringing net income down and we would end up with the same net income. In terms of the equipment, it's on the books for the same amount. That doesn't change. What does change is the accumulated depreciation is now going up. That's a contra asset account bringing the book value of the debit minus the credit down to in this case 79.375. So notice you can basically see everything you want to see on the trial balance. We're gonna do this one more time and we can see now once again if we look at the new year four and we're ready to go in year four meaning everything has been recorded except this adjusting journal entry meaning that these accounts are now basically one account over here. These have been closed out into this and we're assuming again we just made 100,000 that's all we have for the year that we just made 100,000 same amount and we're going to record the last entry once we do this calculation. So what's going to be the calculation terms of year four for the book value? The cost will be the same and then the depreciate the accumulated depreciation is going to be again we could just add up the depreciation for the four years now is 237.5 or we can take the prior year plus the current year's depreciation expense that will give us the 237.5. How do you calculate the book value? It equals the cost minus the accumulated depreciation of 237.5 giving us the 20,000. That 20,000 should look familiar because that equals our salvage value. So remember that the salvage value is what we wanted to bring the cost down to because that's going to be the value of the equipment after it's useful life is over useful life being four years therefore the book value needs to be down to 20,000. If we go under that then we're going below the salvage value and that's not what we want to do. So even though we have the equipment next year we're just going to stop depreciating it and so that might be that we have it for another three years or something and and it works fine we're using it we're getting value of it if if we've fully depreciated it already we cannot keep depreciating it below the book value because we're allocating the cost over the life. Alright so let's post this last one I'm going to go down here to m14 it equals the depreciation debit once again for year four credit the same amount and see what happens over here to our year four trial balance we can see that once again we have the same amount of the hundred minus the 59 375 the income minus that expense would have the same exact effect over the four-year period if that was the only factor of the expenses and the revenue stayed constant and then our book value the equipment still on the books for the 257 five debit then we have our contra asset of 237 five credit for human depreciation book value 20,000 that's it what happens next year we don't record depreciation and you might say well what if we're still have the equipment we have the equipment on there at zero even though it's still there and it's still being used well if it's significantly a value there is significantly there and we have not and we've recorded it incorrectly meaning our depreciation was very strongly disvalued then we may say that there was an error in the estimate and we'd have to make that assessment but what we wouldn't do is keep depreciating it below zero we can't we cannot make this value go below the cost because we can't allocate more cost than we paid for the equipment