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 Activity 1. What is a doubtful debt? A. A debtor that cannot pay the business 2. 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 reputation 4. Why does a business account for depreciation? A. To provide a realistic cost of an asset 5. 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 year 6. 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 Asset 1. Eliminate the original cost of fixed asset from the ledger 2. Eliminate the accumulated depreciation on that fixed asset 3. Record the amount received for fixed asset 4. 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 1 st Jan 2005 for £12,000. The equipment was depreciated by 25% using the straight line method on the 31 st Dec 2005 and On 17 th 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 Bank12,000 Dec P&L 3,000 Dec Bal c/d 6,000Dec 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 12,000May 17 Depreciation 6,000 May 17 Bank 2,300 May 17 P&L (loss) 3,700 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