When assets are being used, they fall in value. This fall in value is referred to as depreciation.
Depreciation is an expense this is why it is charged to the profit and Loss account and it reduces profit.
Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is charged to the cost in the first year to find depreciation, the depreciation calculated is deducted to the cost in the second or later years, the same percentage is charged but on the remaining balance, also called diminishing balance method
Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is charged to the cost in the first year to find depreciation, the depreciation calculated is deducted to the cost in the second or later years, the same percentage is charged but on the remaining balance, also called diminishing balance method
Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is charged to the cost in the first year to find depreciation, the depreciation calculated is deducted to the cost in the second or later years, the same percentage is charged but on the remaining balance, also called diminishing balance method
Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is charged to the cost in the first year to find depreciation, the depreciation calculated is deducted to the cost in the second or later years, the same percentage is charged but on the remaining balance, also called diminishing balance method
Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is charged to the cost in the first year to find depreciation, the depreciation calculated is deducted to the cost in the second or later years, the same percentage is charged but on the remaining balance, also called diminishing balance method
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CHAPTER 12
DEPRECIATION OF FIXED ASSETS
When assets are being used, they fall in value. This fall in value is referred to as
depreciation.
Depreciation is an expense this is why it is charged to the profit and Loss
account and it reduces profit.
Method of calculating depreciation
Straight line method
Depreciation calculated is charged throughout the period also called Fixed
instalment method
Depreciation calculation
Cost÷Number of years(expected)
Or
(Cost –Residual value) ÷ Number of years(expected)
Example
A Motor Vehicle is bought for $16,000, it is will be kept for 5 years then
disposed of for $2,000.
Cost = $16,000
Disposal value = $2,000
Expected life = 5 Years
($16,000 - $2,000) ÷ 5 = $2,800
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Reducing Balance Method
Through this method, a fixed percentage is used, ie. 20% this percentage is
charged to the cost in the first year to find depreciation, the depreciation
calculated is deducted to the cost in the second or later years, the same
percentage is charged but on the remaining balance, also called diminishing
balance method.
Example
Land is bought for $15,000 depreciation is charged at 15%, show calculations
for 4 years.
NOTE: Net Book value (NBV) is the residual value or the amount remaining
after deductiong depreciation from the asset.
Exercise
a) A Motor Van is bought for $20,000 it is to be used in the business for 5
years then sold for $5,000. Calculate depreciation using straight line
method
b) A Motor lorry is bought for $25,000 it is to be depreciated at 20%
reducing balance method, calculate depreciation for 3 years.
c) A Machine is bought for $30,000 it is to depreciated at 10% reducing
balance method. Calculated depreciation for 4 years.
d) A printer is bought for $8,000 it will be used for 4 years then sold at a
scrap value of $400. Calculate deprecaiton.
Double entry for depreciation
An account is used to capture depreciation for years the asset was in use, this
account is called accumulated depreciation account.
Double entry is:
Dr: Profit and Loss account
Cr: Provision for Depreciation Account
Example
A Motor Van is bought for $15,000 on 1 January 20X5, it is to be depreciated at
the rate of 15% using reducing balance method, the financial year of the
business ends on 31 December. Show how the books would look for 4 years.
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Now try these questions
a) Land is bought for $20,000 on 1 January 20X3, it is to be depreciated at
the rate of 20% reducing balance method, the financial year of the
business ends on 31 December. Show how the books would look for 3
years.
b) A Machine is bought for $30,000 on 1 January 20X2, it is to be
depreciated at the rate of 30% reducing balance method, the financial
year of the business ends on 31 December. Show how the books would
look for 3 years.
c) An Office Building is bought for $40,000 on 1 January 20X6, it is to be
depreciated at the rate of 40% reducing balance method, the financial
year of the business ends on 31 December. Show how the books would
look for 3 years.
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ASSET DISPOSAL
When an asset is bought it can also be sold at a later date, the business can can
make a loss or a loss from the sale.
When an asset is sold,we have to remove it from the asset account.
The double entry is:
Debit Asset Disposal Account
Credit Asset Account
Transfer the depreciation already charged to the asset account
Double entry is:
Debit Provision for Depreciation Account
Credit Asset Disposal Account
If payment was received from the asset sold
Double entry is:
Debit cash book
Credit Asset Disposal Account
EXAMPLE
Heavy machines Ltd charges depreciation at 25% per annum. Its financial year
ends on 31 December.
Depreciation of asset sold should be ignored in the year of sale in depreciation
provision account.
Using the information provided above for Heavy Machines ltd Prepare:
a) Machinery Account for all the years the assets were in use
b) The Accumulated Depreciation for all the years the assets were in use
c) The Asset Disposal Account
d) Profit and Loss extract for all the years the assets were in use
e) Balance Sheet extract for all the years the assets were in use
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Exercise
Grand machines Ltd charges depreciation at 15% per annum. Its financial year
ends on 31 December.
Depreciation of asset sold should be ignored in the year of sale in depreciation
provision account.
Using the information provided above for Heavy Machines ltd Prepare:
a) Machinery Account for all the years the assets were in use
11. Page | 11
b) The Accumulated Depreciation for all the years the assets were in use
c) The Asset Disposal Account
d) Profit and Loss extract for all the years the assets were in use
Exercise
Compumax Ltd charges depreciation at 10% per annum. Its financial year ends
on 31 December.
Depreciation of asset sold should be ignored in the year of sale in depreciation
provision account.
Using the information provided above for Heavy Machines ltd Prepare:
a) Machinery Account for all the years the assets were in use
b) The Accumulated Depreciation for all the years the assets were in use
c) The Asset Disposal Account
d) Profit and Loss extract for all the years the assets were in use
Exercise
Printex Ltd charges depreciation at 10% per annum. Its financial year ends on
31 December.
Depreciation of asset sold should be ignored in the year of sale in depreciation
provision account.
Using the information provided above for Heavy Machines ltd Prepare:
a) Machinery Account for all the years the assets were in use
b) The Accumulated Depreciation for all the years the assets were in use
c) The Asset Disposal Account
d) Profit and Loss extract for all the years the assets were in use
12. Page | 12
Exercise
Copycat Ltd charges depreciation at 15% per annum. Its financial year ends on
31 December.
Depreciation of asset sold should be ignored in the year of sale in depreciation
provision account.
Using the information provided above for Heavy Machines ltd Prepare:
a) Machinery Account for all the years the assets were in use
b) The Accumulated Depreciation for all the years the assets were in use
c) The Asset Disposal Account
d) Profit and Loss extract for all the years the assets were in use
13. Page | 13
CHAPTER 13
ABOUT THE AUTHOR
Davie Kaliu was born and raised in Malawi, a country
in the southern part of Africa.
He is married to Lucina and together they have three
children, two boys; Tony and Davie Jr, and a girl
Evalister. He also looks after three high school
children.
He studied accounting and spent early years of his
carrier as a high school accounting teacher.
When he is not writing books, he is writing poetry or
growing vegetables
He has plans to write computer and fiction books.
More books coming your way, get ready.
+265 881123815
kaliudavie2018@gmail.com
dkaliu@yahoo.com
Also by the same author
Double entry book keeping using T accounts.
Revenue and Expenditure.
Drawings.
Balancing off the accounts.
Balancing off the accounts using Microsoft excel
Final accounts of a sole trader.
Preparation of final accounts using Microsoft excel
Depreciation of fixed assets.
Bad debts and Provision for bad debts.
The cashbook.
Preparation of cashbook using Microsoft excel.
The petty cashbook.
Preparation of Petty cashbook using Microsoft excel.
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