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Definition
The Objective of
Depreciation
Depreciable Assets
Non-Depreciable Asset
Freehold Land
Investment Property
Depreciation Methods
Residual Value
Example
Cost of asset
$1200
4 years
Example
Reason
Example
Cost of assets
Residual value
Useful life
$10,000
$256
4 years
Depreciation Rate
= (1 -
256
100,000
= (1 0.4) x 100%
= 60%
) x
100%
Annual Depreciation
Annual Depreciation
= Net Book Value x Depreciation Rate
= (Cost Accumulated Depreciation) x Depreciation Rate
=$ 384
Depreciation
= Value at the beginning of the year (Opening
balance) + Purchases in the year Value at the
end of the year (Closing balance)
Balance b/f
Bank
Asset
opening P & L Depreciation X
purchases Balance c/f
closing
X
X
Example
The value of the loose tools changes during 1996 as shown below:
1996
Jan 1
Value of loose tools
$2,000
Dec 31
Purchases in the year
$ 500
Dec 31
Value of loose tools
$1,000
Loose Tools
1996
$
1996
$
Jan 1 Balance b/f
2,000 Dec 31 P & L
1,500
Dec 31 Bank-purchases
500 Dec 31 Balance c/f
1,000
2,500
2,500
Depreciation for the year = $1,500
Depreciation should be
charged as follows:
Year 1
Year 2
Year 3
Year 4
With diminishing
years of life to run
Example
Cost of asset
Estimated useful life
No scrap value
Sum of digits = 5(5+1) / 2 = 15
Depreciation charge:
$9,000
5 years
Example
Depreciation charge:
Year 1
800 hours
Year 2
600 hours
Year 3
350 hours
Year 4
250 hours
Depreciation charge:
Year 1 $10,000 x 800/2,000 = $4,000
Year 2 $10,000 x 600/2,000 = $3,000
Accounting for
Depreciation
Accounting Treatment
Dr.
Fixed Asset
Cr.
Bank/Vendor
Dr.
Cr.
Example
Machinery
Year 1
Jan 1 Bank
Year 1
$
Year 1
$
2,000 Dec 31 Bal c/d 2,000
400
Depreciation - Machinery
400
Machinery at cost
2,000
400
1,600
Year 2
Year 2
800 Jan 1
Bal. b/d
Dec 31 P/L
800
(2000/5)
$
400
400
400
800
Less: Expenses
Depreciation - Machinery
Year 1
Year 2
400
400
Year 2
Machinery at cost
2,000
2,000
400
1,600
800
1,200
Fixed Asset
Year 3
$
400
400
400
800
800
400
1,200
Year 2
Year 3
400
400
400
Year 1
Year 2
Year 3
Machinery at cost
2,000
2,000
2,000
400
1,600
800
1,200
1,200
800
Less: Expenses
Depreciation - Machinery
Fixed Asset
Year 1
Jan 1 Bank
Machinery
$
Year 1
$
2,000 Dec 31 Bal c/d 2,000
$
400
Depreciation - Machinery
400
Machinery at cost
2,000
400
1,600
Year 2
$
400
400
320
720
Less: Expenses
Depreciation - Machinery
Year 1
Year 2
400
320
Year 2
Machinery at cost
2,000
2,000
400
1,600
720
1,280
Fixed Asset
Year 3
$
400
400
320
720
720
256
976
Year 2
Year 3
400
320
256
Year 1
Year 2
Year 3
Machinery at cost
2,000
2,000
2,000
400
1,600
720
1,280
976
1,024
Less: Expenses
Depreciation - Machinery
Fixed Asset
Disposal Account
Accounting Treatment
Dr. Disposal
Cr. Fixed Asset
Example
Machinery
Year 4
Jan 1
$ Year 4
Bal. b/d
2,000 Dec 31
$
Disposal 2,000
Dec 31 Disposal
976
Year 4
976
Disposal
Year 4
Year 4
X
46
X
Year 4
976
900
124
2,000
Depreciation on
monthly/full-year basis
Example
1.
2.
(1.)
1996
July 1 Bank
1996
Dec 31 Bal. c/d
Motor Vehicles
$ 1996
4,800 Dec 31 Bal. c/d
1996
$
4,800
$
480
1996
July 1 Bank
Motor Vehicles
$ 1996
4,800
1997
4,800
1997
4,800
1996
4,800
$
1997
Dec 31 Bal. c/d
480
1997
1,440 Jan 1
Bal. b/d
480
Dec 31 P/L
($4,800 x 20%)
1,440
960
1,440
1996
July 1 Bank
1997
Jan 1 Bal. b/d
1998
Jan 1 Bal. b/d
Motor Vehicles
$
4,800 Dec 31 Bal. c/d
Year 2
4,800 Dec 31 Bal. c/d
$
4,800
4,800
1998
1996
1997
Dec 31 Bal. c/d
480
1997
1,440 Jan 1
Bal. b/d
480
Dec 31 P/L
($4,800 x 20%)
1998
Dec 31 Disposal [$2,400
x 20% x (6/12 + 1 + 3/12)]
Dec 31 Bal. c/f
1,440
1,440
1998
Jan 1
Bal. b/d
960
1,440
600
2,040
1998
Apr 1 Bank
Dec 31 P/L loss
2,400
840
1,500
60
2,400
(2.)
1996
July 1 Bank
1996
Dec 31 Bal. c/d
Motor Vehicles
$ 1996
4,800 Dec 31 Bal. c/d
1996
$
4,800
$
960
1996
July 1 Bank
Motor Vehicles
$ 1996
4,800
1997
1996
4,800
1997
4,800
1996
1997
Dec 31 Bal. c/d
4,800
960
1997
1,920 Jan 1
Bal. b/d
960
960
1,920
(2.)
1996
July 1 Bank
1997
Jan 1 Bal. b/d
1998
Jan 1 Bal. b/d
Motor Vehicles
$ 1996
4,800 Dec 31 Bal. c/d
Year 2
4,800 Dec 31 Bal. c/d
$
4,800
4,800
1998
2,400
2,400
4,800
1997
Dec 31 Bal. c/d
1996
1997
1,920 Jan 1
Bal. b/d
1,920
1998
960
Jan 1
Bal. b/d
960
960
1,920
1,920
480
2,400
1998
$
960
1,500
2,460
Trade-in-allowance
Accounting entries:
Dr.
Cr.
Fixed Assets
Disposal
Example
Machinery
$ Year 1
2,500 Dec 31 Bal. c/d
Year 1
Jan 1 Bank
Year 1
$
2,500
500
Year 2
Jan 1 Bal. b/d
Feb1 Disposal: trade-
Machinery
Year 2
$
2,500 Feb 1 Disposal
Dec 31 Bal. c/d
in-allowance
Feb1 Bank
Year 1
Dec 31
Year 2
Feb 1
1,000
3,000
6,500
Provision for dep.-Machinery
$ Year 1
Bal. c/d
500 Dec 31 P/L
Year 2
Disposal
500 Jan 1 Bal b/d
$
2,500
4,000
Year 2
Feb 1 Machinery
Disposal
$ Year 2
2,500
Feb1 Dep.
Feb 1 Machinery:
trade-in-allowance
2,500
6,500
$
500
500
$
500
1,000
2,500
Factors
Determining the
Amount of
Depreciation
Cost
Purchase price
Production cost
Revalued Value
Purchases Price
Example
Expenditure
items
Invoice price
Import duty
Landing charges
Installation cost
Capital
expenditure
$
50,000
5,000
2,000
Revenue
expenditure
$
1,000
Service charges
800
58,000
800
Example
List price
Less Trade discount
Trade-in value
200,000
10,000
50,000
60,000
140,000
Delivery charges
Adaptation and testing
2,000
3,000
Maintenance
Spare components
1,500
1,000
7,500
147,500
Expenditure items
Invoice price
($200,000 - $10,000)
Capital
expenditure
$
Revenue
expenditure
$
190,000
Delivery charges
2,000
Adaptation and
testing
3,000
Maintenance
1,500
Service charges
1,000
2,500
195,000
Cost of the machine = $195,000
Annual depreciation =$195,000*10% = $1,950
Production cost
Example
8,000
120,000
5,000
2,000
3,000
Revalued value
Example
500
1,000
Expenditure
Capital Expenditure
It is an expenditure to:
Example
Revenue Expenditure
It is an expenditure for:
Example
Accounting Treatment
Capital Expenditure
On acquiring assets,
Dr. Asset accounts
Cr. Bank / Cash / Creditors
Example
Expenditure
(a) Buying a
house
Benefit
Long-term
benefit
fixed asset
acquired
Nature of Accounting
Expenditure Treatment
Capital
Dr. Premises
Cr.
Bank/Cash/
Creditor
Capital
Dr. Premises
Cr.
Bank/Cash/
Creditor
Expenditure
Benefit
(c) Installation
of partition
walls and
lighting
system in
preparing
the flat for
use as an
office
Long-term
benefit
to prepare the
asset for
intended use
Nature of Accounting
Expenditure Treatment
Capital
Dr. Premises
Cr. Bank/Cash/
Creditor
Expenditure
(d) Renting a
house
Benefit
Short-term
benefit
consumed
within current
accounting
period
(e) Management Short-term
fee
benefit
consumed
within current
accounting
period
Nature of Accounting
Expenditure Treatment
Revenue
Dr. Rent
Cr. Bank/Cash/
Creditor
Revenue
Dr.
Management
fee
Cr.
Bank/Cash/
Creditor
Capital Income
Revenue Income
Accounting Treatment
Revenue Income
This is normal trading income, and will
be credited to Trading Account.
Trading Account
$
Sales
Capital Income
Profit on Disposal
Revaluation
Revaluation Profit
Revaluation Loss