Depreciation 2 Accounting entries Once depreciation has been

Depreciation 2

Accounting entries 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. © Hodder Education 2008

Example 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 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. © Hodder Education 2008

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

Calculating the depreciation MV 1 MV 2 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 © Hodder Education 2008

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

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. © Hodder Education 2008

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

Disposal of an asset © 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. © Hodder Education 2008

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

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

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

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

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

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

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

Transfer balance on disposals account to the profit and loss account 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 © Hodder Education 2008

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

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 10, 800 © 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 25, 000 © Hodder Education 2008 1, 800 25, 000

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

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. ) © 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. © 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 bookkeeping entry, not a movement of cash. © Hodder Education 2008