- Depreciation must be recorded through double-entry bookkeeping, with a separate provision for depreciation account for each depreciated asset. - Brian Blackpool calculates depreciation on two motor vehicles using the reducing balance method at 20% annually. He sells the first vehicle in 2007. - To account for the disposal, the motor vehicle account is debited to transfer the original cost to the disposals account, the provision for depreciation account is debited to transfer accumulated depreciation, and the disposals account is credited with the sale proceeds.

1. Depreciation 2

2. © Hodder Education 2008
Once depreciation has been calculated it must
then be entered in the double entry accounts.
A separate provision for depreciation account
must be opened for each type of asset that is
depreciated.
Accounting entries

3. © Hodder Education 2008
Brian Blackpool, a trader with a year-end of 31 December, had
the following transactions in his accounts:
He purchased a motor vehicle for £25,000 on 1 January
2004.
Brian purchased a second motor vehicle on 1 January 2005
for £30,000.
He calculates depreciation using the reducing balance method
at 20% per annum.
Required
Example
a) The motor vehicle account.
b) The provision for depreciation account.
c) The profit and loss account extracts and balance sheet
extracts for the years 2004, 2005 and 2006.

4. © Hodder Education 2008
Motor vehicles
01/01/04 bank 25,000 31/12/04 bal c/d 25,000
25,000 25,000
01/01/05 bal b/d 25,000 31/12/05 bal c/d 55,000
01/01/05 bank 30,000
55,000 55,000
01/01/06 bal b/d 55,000 31/12/06 bal c/d 55,000
55,000 55,000
01/01/07 bal b/d 55,000

5. © Hodder Education 2008
Calculating the
depreciation
MV 1 MV2 Total
31/12/04 5,000 - 5,000
31/12/05 4,000 6,000 10,000
31/12/06 3,200 4,800 8,000

6. © Hodder Education 2008
Provision for depreciation
31/12/04 bal c/d 5,000 31/12/04 Profit & loss 5,000
5,000 5,000
31/12/05 bal c/d 15,000 01/01/05 bal b/d 5,000
31/12/05 Profit & loss 10,000
15,000 15,000
31/12/06 bal c/d 23,000 01/01/06 bal b/d 15,000
31/12/06 Profit & loss 8,000
23,000 23,000
01/01/07 bal b/d 23,000

7. © Hodder Education 2008
Profit and loss account (extract)
Less expenses
31/12/04 Provision for depreciation 5,000
31/12/05 Provision for depreciation 10,000
31/12/06 Provision for depreciation 8,000

8. © Hodder Education 2008
Balance sheet (extract)
Cost Dep'n to date NBV
31/12/04 Motor vehicle 25,000 5,000 20,000
31/12/05 Motor vehicles 55,000 15,000 40,000
31/12/06 Motor vehicles 55,000 23,000 32,000

9. © Hodder Education 2008
Tips
 It is useful to open up both accounts and
work in date order through the transactions.
 Always show the correct narrative in your
double entry accounts.
 Balance your accounts.
 Always use a ruler to draw up your
accounts and for ruling off.
 Balance sheet extract should show net
book value.

10. © Hodder Education 2008
Tasks
 Complete Question 4 on task sheet.
 Complete Questions 1–4, Chapter 16 of
text book.

11. © Hodder Education 2008
Disposal of an asset

12. © Hodder Education 2008
The disposal of an
asset
When a fixed asset is sold or disposed, it is
necessary to bring together:
 The original cost of the asset.
 Depreciation provided over the life of the
asset.
 Sale proceeds.

13. © Hodder Education 2008
This can be achieved using the
following accounts:
Fixed asset account
Provision for depreciation
account
Disposals account

14. © Hodder Education 2008
On 1 January 2007, Brian Blackpool sold the
motor vehicle he purchased on 1 January
2004 for £11,000.
Required
Show the accounting entries for the disposal
of the asset, together with the extracts for the
profit and loss account and balance sheet
extracts for the year ending 31 December
2007.

15. © Hodder Education 2008
If we start with the balance b/d in the previous double
entry accounts for:
 motor vehicles
 provision for depreciation
we can now show the accounting entries for the disposal
of the asset.

16. © Hodder Education 2008
Motor vehicle account
£
01/01/07 bal b/d 55,000

17. © Hodder Education 2008
Provision for depreciation account
£
01/01/07 bal b/d 23,000

18. © Hodder Education 2008
Debit disposals account
Credit fixed asset account
Double entry
transactions for
disposal of an
asset
1) Transfer the cost price of the asset
sold to the disposal account

19. © Hodder Education 2008
Debit cash book
Credit disposals account
2) Transfer the depreciation already
charged to the disposal account
Debit provisions for
depreciation account
Credit disposals account
3) For sale proceeds

20. © Hodder Education 2008
Motor vehicle account
£ £
01/01/07 bal b/d 55,000 01/01/07 Disposals 25,000
We can now balance the account

21. © Hodder Education 2008
Provision for depreciation account
£ £
01/01/07 Disposals 12,200 01/01/07 bal b/d 23,000
We can now balance the account

22. © Hodder Education 2008
Disposals account
£ £
01/01/07 Motor vehicles 25,000 01/01/07 Provision for
depreciation
12,200
01/01/07 Bank 11,000
We can now close the account, the difference
being transferred to the profit and loss account
as a profit on disposal (entry on the debit side)
or a loss on disposal (entry on the credit side).

23. © Hodder Education 2008
If the difference is on the debit side of the
disposal account, it is a profit on sale
Credit profit and loss account
Debit disposals account
If the difference is on the credit side of the
disposal account, it is a loss on sale
Debit profit and loss account
Credit disposals account
Transfer balance on
disposals account to the
profit and loss account

24. © Hodder Education 2008
Motor vehicle account
£ £
01/01/07 bal b/d 55,000 01/01/07 Disposals 25,000
31/12/07 bal c/d 30,000
01/01/08 bal b/d
55,000
30,000
55,000

25. © Hodder Education 2008
Provision for depreciation account
£ £
01/01/07 Disposals 12,200 01/01/07 bal b/d 23,000
31/12/ bal c/d 10,800
23,000
01/01/08 bal b/d
23,000
10,800

26. © Hodder Education 2008
Disposals account
£ £
01/01/07 Motor vehicles 25,000 01/01/07 Prov for dep’n 12,200
01/01/07 Bank 11,000
01/01/07 Profit & loss 1,800
25,000 25,000

27. © Hodder Education 2008
Profit and loss
account (extract)
Less expenses
Loss on disposal 1,800

28. © Hodder Education 2008
Problems involved
in accounting for
depreciation
 Selection of appropriate method
 Estimating the useful life of the asset
 Determination of the cost of a fixed
asset (correctly dealing with delivery
installation and legal fees etc.)

29. © Hodder Education 2008
Concepts
Accruals – matching what has been
used of an asset to that period of time.
Prudence – not overstating the profit
in the profit and loss account or the
value of assets in the balance sheet.
Consistency – Using the same
method and percentage year on year.

30. © Hodder Education 2008
Tips
 Use a ruler
 Correct narratives
 Set your work out neatly
 Take care to correctly distinguish
between why depreciation is provided
in the final accounts and the causes of
depreciation.
 Remember depreciation is a book-
keeping entry, not a movement of
cash.

31. © Hodder Education 2008
Tasks
Complete Question 5 on task sheet,
Questions 5 – 20, Chapter 16 and
OCR exam question.