Revision- Depreciation

Lesson Objectives

£ To be able to explain the two methods of depreciation

££ To be able to identify why a provision for depreciation is required

£££ To be able to record the sale of an asset

Starter Activity1. What is a doubtful debt?A. A debtor that cannot pay the business2. What is a bad debt recovered?A. When a business has written off a debt, but the debtor pays up.3. Why may a debtor pay up if debt has been written off?A. Debtor wants to trade with them in the future, does not want a bad

reputation4. Why does a business account for depreciation?A. To provide a realistic cost of an asset5. What is the difference between straight-line and reducing-balance

methods of depreciation?A. Straight= Same amount is removed from the asset each year

Reducing= Amount of depreciation changes each year6. What is the difference between capital and revenue expenditure?A. Capital= Money spent on fixed assets, intended for future use

Revenue= Money spent on running costs, not intended to be kept for the long term

Depreciation

Straight-line

Easy to calculate Even depreciation

charge each year Asset will be

considered worthless in the end

Reducing-balance

Complex to calculate More realistic

compared to S/L % is always taken

from the value of the asset

Recording Depreciation A provision for depreciation is created in the

general ledger, this will contain all of the charges for depreciation over the financial period.

At the end of the period the total is recorded:Dr – Profit and loss account (expense)Cr – Provision for depreciation account (liability)

Depreciation accumulates in the provision for depreciation account until the asset is sold or scrapped

Recording The Sale Of A Fixed Asset1. Eliminate the original cost of fixed asset from

the ledger2. Eliminate the accumulated depreciation on

that fixed asset3. Record the amount received for fixed asset4. Was a profit or loss made on the asset? A fixed asset disposal account will have to be

created, this account shows the profit or loss made on the item when closed.

Profit or loss is then transferred to P&L as a gain or a loss

Murray Traders

Murray traders purchased office equipment on 1st Jan 2005 for £12,000. The equipment was depreciated by 25% using the straight line method on the 31st Dec 2005 and 2006.

On 17th May 2007 the equipment was sold for £2,300

Record the disposal of the fixed asset in the businesses ledger

Use the following ledgers

Office Equipment at Cost

Provision for Depreciation Account

Jan 1 05 Bank 12,000

Dec 31 05 P&L 3,000

Dec 31 06 Bal c/d 6,000 Dec 31 06 P&L 3,000

6,000 6,000

Jan 1 07 Bal b/d 6,000

Record the original cost of the equipment

Record the depreciation for the two years 2005 and 2006

Balance the provision for depreciation account

Need Some Help?1. Prepare an “Office Equipment Disposal Account”2. Transfer the cost of the office equipment to the

disposal account (mirror move)3. Transfer the accumulated depreciation charge to the

disposal account (mirror move)4. Record the receipt of the cheque in the disposal

account (income)5. Balance the disposal account. Balance will show a

Profit (DR balancing figure) or Loss (CR balancing figure), this is transferred to the Profit & Loss account.

6. Murray traders make a loss on the sale of the asset = CR entry.

Office Equipment Disposal Account

May 17 Disposal 12,000 May 17 Depreciation 6,000May 17 Bank 2,300May 17 P&L (loss) 3,700

12,000 12,000

Quick recap- Errors not revealed by a trial balance. Name them…

1. Commission

2. Reversal

3. Omission

4. Principle

5. Original entry

6. Compensating

Explain each with an example

CROPOC

Commission- Correct amount entered into correct side of wrong account

Reversal of entry- Correct amounts entered into the wrong sides of account

Omission- Transaction missed from ledgers Principle- Transaction is posted to incorrect class of

account, but on correct side Original entry- Amount is entered wrong Compensating errors- Errors made on both side

that equal the same