Depreciation of fixed asssets and final accounts

1. 1
Mr. R S Ch Murthy Chodisetty
M.Com., MBA (HR)., MBA (FIN)., (PhD).
Faculty of Management, Sreenidhi Institute of Science and Technology,
Hyderabad, Telangana.
5

2. 2
DEPRECIATION OF FIXED ASSSETS AND FINAL
ACCOUNTS
LECTURE-5

3. 3
Introduction to Depreciation:
Depreciation, i.e. a decrease in an asset's value, may be caused by a number of
other factors as well such as unfavorable market conditions, etc. Machinery,
equipment, currency are some examples of assets that are likely to depreciate
over a specific period of time. Opposite of depreciation is appreciation which
is increase in the value of an asset over a period of time.

4. 4
TYPES OF DEPRECIATIAON:
® Straight-line Method
® Diminishing Method

5. 5
Straight-line Method :
Straight line depreciation is the default method used to recognize the carrying
amount of a fixed asset evenly over its useful life. ... Divide the estimated useful life
(in years) into 1 to arrive at the straight-line depreciation rate. Multiply the
depreciation rate by the asset cost (less salvage value)
● Depreciation per annum =
( Cost − Residual Value )
Useful Life
● Depreciation per annum =
( Cost − Residual Value ) x Rate of
depreciation

6. 6
Diminishing Method :
Prime cost (straight line) and diminishing value methods. In most cases, you can
choose to use either of two alternative methods for calculating depreciation: ...
The diminishing value method assumes that the value of a depreciating asset
decreases more in the early years of its effective life.
● Depreciation per annum =
( Cost − Residual Value )
Useful Life
● Depreciation per annum =
( Cost − Residual Value ) x Rate of
depreciation

7. 7
TRIAL BALANCE:
® The Trial Balance contains the debit and credit balances of all LEDGER accounts, it
is very much useful in preparation of FINAL ACCOUNTS.
® It is a connecting link between the LEDGER & FINAL ACCOUNTS.
® Trial Balance can be prepared at any time & not necessarily at the end of a
calendar or accounting year.
® It is the only base for preparation of FINAL ACCOUNTS
A Trial Balance may be simply defined as a statement prepared by
putting all DEBITS on one side and all CREDITS on the other side to
check the Arithmetical accuracy of the ledger balances

8. 8
The following accounts will appear on DEBIT side of Trial Balance,
Asset accounts & accounts relating to expenses & losses
The following accounts will appear on CREDIT side of Trial Balance,
Liabilities accounts & accounts relating to incomes & gains
PREPARATION OF TRIAL BALANCE

9. 9
PREPARATION OF TRIAL BALANCE
Asset accounts: land, buildings, plant & machinery, debtors, stock, cash, bills
receivables (B/R) prepaid expenses, etc .
Liabilities accounts: creditors, bills payable, bank over draft, loans taken,
mortgage, all types of reserves and funds etc.
Accounts relating to expenses and losses: wages, salaries, rent, discount
allowed (discount), bad debts, depreciation, purchases, sales return (return
inwards)
Accounts relating to incomes and gains: interest received, rent amount
collected, discount received (discount), sales, purchase returns ( return
inwards)

10. 10
Final Account:
Final accounts is a somewhat archaic bookkeeping term that refers to
the final trial balance at the end of an accounting period from which the
financial statements are derived. This final trial balance includes all of the
journal entries used to close the books, such as: Wage and payroll tax accruals.
1. Trading Account / Manufacturing Account
2. Profit and Loss Account
3. Balance Sheet

11. 11
Trading Account :
Trading account is prepared at the end of each accounting period to assess the GROSS
PROFIT/LOSS.
GROSS PROFIT = Net sales – COGS
GROSS LOSS = COGS – Net sales
Net sales = sales – sales returns
COGS or cost of production or cost of goods sold = opening stock + purchases +
direct expenses – closing stock

12. 12
Trading Account Format:
Particulars amount Particulars amount
To opening stock
To purchases xxxx
Less: returns xx
To carriage inwards
To wages
To freight/cartage
To customs duty
To gas, fuel, coal
To factory expenses
To other man. Expenses
To productive expenses
To gross profit c/d
(Transferred to P&L account)
Xxxx
Xxxx
xxxx
Xxxx
Xxxx
Xxxx
Xxxx
By sales xxxx
Less: returns xxx
By closing stock
By goods destroyed by fire
By gross loss
(Transferred to P&L account)
xxxx
Xxxx
xxxx

13. 13
Profit and loss Account Format:
Particulars amt Particulars amt
TO office salaries
TO rent, rates, taxes
TO Printing and stationery
TO Legal charges
To Audit fee
TO Insurance
TO General expenses
TO Advertisements
TO Bad debts
TO Carriage outwards
TO Repairs
TO Depreciation
TO interest paid
TO Interest on capital
TO Interest on loans
TO Discount allowed
TO Commission
TO Net profit-------
(transferred to capital a/c)
XxxxxxXxxxxXxx
xxXxxxXxxxXxxx
XxxxxXxxxXxxx
XxxxXxxxxXxxxx
XxxxxXxxxXxxxx
XxxxxXxxxxxxxx
xxxxxx
Xxxx
Xxxx
Xxxxx
Xxxxx
Xxxx
Xxxxx
By gross profit b/d
By Interest received
By Discount received
By Commission received
By Income from investments
By Dividend on shares
By Rent received
Xxxxxxxx
Xxxx
Xxx
Xxxx
Xxxx
xxxxxx

14. 14
Balance Sheet Format:
® The preparation of Balance sheet is the last and third stage of Final accounts.
® The balance sheet has to be prepared only after the preparation of Trading &
Profit & Loss account.
® Trading & Profit & Loss account are prepared for a period of time where as the
Balance sheet is prepared on a particular point of time
® “Balance sheet is a Statement prepared on particular date to reflect the financial
position of the firm with all the assets and liabilities of the firm”
® Balance sheet is not an account but it is a final statement of the financial position
of a business on a closing date.
® Assets are shown on the right side, liabilities including Capital is shown on the
left side of the Balance sheet.

15. 15
Balance Sheet Format:
Liabilities amt Assets amt
Creditors
Bills payable
Bank overdraft
Loans
Mortgage
Reserve fund
Capital xxxx
+ Additional capital xx
+ Interest on capital x
+ Net profit xxx
Less
Drawings xxx
Interest on drawings xx
Net loss xxx
Xxx
Xxxx
Xxxxx
Xxxx
Xxxxx
Xxxxx
Cash in hand
Cash at bank
Bills receivable
Debtors
Closing stock
Investments
Furniture and fittings
Plats machinery
Land & buildings
Goodwill
Prepaid expenses
Outstanding incomes
xXxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
xxx

16. 16
THANK YOU