The document discusses depreciation and accounting for fixed assets. It defines depreciation as the systematic allocation of the cost of a fixed asset over its useful life. It lists common types of fixed assets and methods for recording them, including straight-line and written down value depreciation methods. It provides examples of journal entries for purchasing and disposing of fixed assets, and calculating depreciation expense over the life and sale of an asset.
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Financial accounting mgt101 power point slides lecture 18
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Depreciation
“It is a systematic allocation of the cost of a depreciable
asset to expense over its useful life”.
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Classification of Fixed Asset
Land
Building
Plant and machinery
Furniture
Equipment
Vehicles
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• No depreciation is charged on Land.
• Amount paid for Leased Land is charged over the lease
term.
• It is called amortization.
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Policies for Recording Fixed Asset
• Minimum value of item which will be recorded as asset.
• Depreciation method to be used.
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• Cost of Asset – Price at which the asset was initially
recorded.
• Written Down Value / Book Value – Cost minus
Accumulated Depreciation.
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Written Down Value Method
Calculation of Rate
• Rate = 1 – n RV / C
• “RV” = Residual Value
• “C” = Cost
• “n” = Life of Asset
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• Residual Value – is the price at which the asset is expected
to be sold at the end of its useful life.
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Year 1
Cost 100,000
Depreciation 100,000 x 42% (42,000)
WDV (Closing Balance) 58,000
Year 2
WDV (Opening Balance) 58,000
Depreciation 58,000 x 42% (24,360)
WDV (Closing Balance) 33,640
Year 3
WDV (Opening Balance) 33,640
Depreciation 33,640 x 42% (14,128)
WDV (Closing Balance) 19,511
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Disposal of Asset
Cost of Asset = 100,000
Life Of the Asset = 5 Years
Depreciation Method = Straight Line
Residual Value = Rs. 10,000
Sale Price After Five Years = Rs. 15,000
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Method of Depreciation = Straight line
Total Depreciation in Five Years = 18,000 x 5
= 90,000
Book Value After Five Years = 100,000 - 90,000
= 10,000
Profit on Disposal = 15,000 – 10,000
= 5,000
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Recording of Disposal
Recording of Disposal
Debit Fixed Asset Disposal A/c 100,000
Credit Fixed Asset Cost A/c 100,000
(with the cost of asset)
Debit Accumulated Dep. A/c 90,000
Credit Fixed Asset Disposal A/c 90,000
(with the depreciation accumulated to date)
Debit Cash / Bank / Receivable A/c 15,000
Credit Fixed Asset Disposal A/c 15,000
(with the price at which asset is sold)
[note: one group to appear at a time]
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Disposal of Asset Account
Fixed Asset Disposal Account
DEBIT CREDIT
Cost Account 100,000 Acc. Dep. Account 90,000
Cash / Bank 15,000
100,000 105,000
P & L Account 5,000
105,000 105,000Total Total
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• Policy for Charging Depreciation
(1) depreciation can be charged on the basis of use,
OR
(2) full year’s depreciation is charged in the year of
purchase and no depreciation is charged in the year of
sale.
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Example
• An asset is purchased for Rs. 500,000 on Nov. 01, 2001.
• Depreciation rate is 10% p.a.
• The Asset is sold on Apr. 30, 2004.
• Financial Year is July 1 to June 30
Question
• Calculate the WDV For both policies
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Depreciation is Charged on the Basis of USe
Year On the Basis of Use Rs.
1-11-2001 Cost 500,000
2001-2002 Dep. 500,000 x 10% x 8 / 12 (33,333)
30-6-2002 WDV 466,667
2002-2003 Dep. 466,666 x 10% (46,667)
30-6-2003 WDV 420,000
2003-2004 Dep. 420,000 x 10% x 10 / 12 (35,000)
30-4-2004 WDV 385,000
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Full Dep. In the Year of Purchase
Year Full Dep. in year of Purchase Rs.
1-11-2001 Cost 500,000
2001-2002 Dep. 500,000 x 10% (50,000)
30-6-2002 WDV 450,000
2002-2003 Dep. 450,000 x 10% (45,000)
30-6-2003 WDV 405,000
2003-2004 Dep. 00 in the year of sale 00
30-6-2004 WDV 405,000
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Contents of Fixed Assets Register
• Different record for each class of assets
• Date of purchase
• Detailed particulars of asset
• Location of asset
• Record of depreciation