chapter 4c depreciation
TRANSCRIPT
8/2/2019 Chapter 4c Depreciation
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If you want to make your dreams come true,
the first thing you have to do is wake up
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Depreciation
Chapter 4
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Depreciation is an expense
Is an expense of the business and to be
charged to the profit and loss account to
reduce net profit
Depreciation = cost of buying - amount
received on disposal
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Causes of Depreciation
Physical deterioration--
wear andtear; erosion, rust, rot and decay
Economic factors – obsolescence;inadequacy
The time factor –
lease, patent, theterm amortization is used instead ofdepreciation
Depletion – the wasting away of anasset as it is used up (due to the extractionof raw materials), e.g. natural resourcessuch as mines, quarries and oil wells
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Methods of Calculating
Depreciation
1) Straight Line Method/Fixed Installment Method
Amount of depreciation is the samefor every year
yearly depreciation = (cost -estimated disposal value)/number ofexpected years of use
example 1: a motor lorry was bought
for RM22,000 and keep it for 4 yearsand then sell it for RM2,000, thedepreciation to be charged would be :
= (RM22,000 - RM2,000)/4 = RM5,000depreciation each year for 4 years
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2) Reducing Balance Method/Diminishing Balance Method
depreciation is at a lesser amount every followingperiod
a fixed % for depreciation is deducted from the
cost in the 1st year
In the 2nd or later years the same % is taken of thereduced balance (cost less depreciation alreadycharged)
reducing balance method has a much highercharged for depreciation in the early years andlower charges in the later years
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Example 2 A machine is bought for RM10,000 and
depreciation is to be charged at 20%,the calculations for the first three
years would be as follows:
Cost RM10,000
1st year: depreciation (20% of RM10,000) RM 2,000
RM 8,000
2nd year: depreciation (20% of RM8,000) RM 1,600
RM 6,400
3rd year: depreciation (20% of RM6,400) RM 1,280
Cost not yet apportioned, end of year 3 RM 5,120
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3) Sum of the Years’ Digits provides for higher depreciation to be
charged early in thelife of an asset withlower depreciation inlater year
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Example 3: An asset cost RM3,000 will be in use for 5 years, thecalculations will be:
Life of asset during 1st year used 5 years 1st year depreciation
(RM3,000 x 5/15)
RM1,000
Life of asset during 2nd year used 4 years 2nd year
Depreciation
(RM3,000 x 4/15)
RM 800
Life of asset during 3rd year used 3 years 3rd year
Depreciation
(RM3,000 x 3/15)
RM 600
Life of asset during 4th year used 2 years 4th year
Depreciation
(RM3,000 x 2/15)
RM 400
Life of asset during 5th year used 1 year 5th year
Depreciation
(RM3,000 x 1/15)
RM 200
sum of these digits 15 years RM3,000
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4) Units-of-Activity
- establish the total expected units of
output expected from the asset.- Is ideally suits for factory machinery :
production can be measured in terms of
units of output or in terms of machine
hours used in operating the machinery
a)units of output method b) machine hour method
=(cost – salvage
value)x (period’s
production/total
expected production)
=(cost – salvage
value)x(period’s
machine
hours/total expected running machine hours)
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a) units of output method b) machine hour method
example: A machine cost RM6000has an expected salvage value
of RM1000, it is expected to
be able to produce 10,000 tv
set over its useful life and
a total of 1500 tv set are
produced in year 1
example: A machine costRM2000 has no scrap
value and having an
expected running life
of 1000 hours, it was
operated 200 hours
during the first year
1st year depreciation
=(RM6,000-1,000)x(1,500/10,000)= RM750
1st year depreciation
= RM2000(200/1000)= RM400
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eprec a on rov s ons an Assets Bought or Sold
Ignore the dates during the year that the assets
were bought or sold , merely calculating a full
period’s depreciation on the assets in use at theend of the period
assets sold during the accounting period will have
had no provision for depreciation made for that
last period irrespective of how many months they
were in use i.e sold June 2006, so depreciation forJan – June can be ignored.
assets bought during the period will have a full
period of depreciation provision calculated even
though they may not have been owned throughout the
whole of the period i.e bought Nov 2006, sodepreciation charged from Jan – Dec 2006
Method of calculating depreciation provision
for assets bought or sold during an
accounting
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Double Entry Records for
Depreciation
assets accounts are kept at cost
price and the depreciation is
credited to a provision for
depreciation account.
Debit the profit and loss account
Credit
the provision fordepreciation account
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Disposal of Asset
When we sell a fixed asset, we must transfer both the cost and
the accumulated depreciation to a
separate disposal account
profit on disposal is transferred to the credit of the profit and
loss account (increase net profit)
loss on disposal is transferred tothe debit of the profit and loss
account(increase expenses)
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4 steps to records
disposal of asset
1.transfer the cost price of the asset sold to an asset
disposal account
Debit computer disposals account
Credit computer account
2.transfer the depreciation already charged to the assets
disposal accountDebit provision for depreciation :computer
Credit computer disposals account
3.for remittance received on disposal
Debit cash book
Credit computer disposals account
4.transfer the difference to the profit and loss account
Debit computer disposals account (credit balance)
Credit profit and loss account (profit on disposal)
OR
Debit profit and loss account (loss on disposal)
Credit computer disposals account (debit balance)
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Accruals,
prepayments
and other
adjustments
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Other Adjustments for Final
Accounts
Adjustments are needed so that theexpenses and income shown in thefinal accounts will equal theexpenses incurred in the period and
the revenue that has accrued. the balances caused by the
adjustments will be shown on the B/Sat the end of the period
example: The rent for building isRM6000 p.a. :
a) Firm A pays RM5000 in the year;
b) Firm B pays RM6500 in the year
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Expense and Revenue Accounts
for Accruals and Prepayments
Accruals Prepayments
Accrued Expenses
1. an exp. which the firm has used
up but has not yet been paid for2. credit balance (current liability)
Prepaid Expenses
1. an expense to be used up in a following
period but has been paid for in advance2. debit balance (current asset)
Accrued Revenues
1. revenues earned but not yet
received in cash or recorded
2. debit balance (current asset)
Unearned Revenues
1. revenues received in advance
2. credit balance (current liability)
3. if the rent due on 31/12/X5 was received on
01/12/X5 instead of 07/01/X6, the amount
received = RM550. (exercise: write up the
ledger a/c, showing the transfer to the final
accounts and the bal. carried down to the
following year)