15-1 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson Chapter 15 – Depreciation, Disposal of Assets and Asset Registers Learning Outcome This chapter shows how to calculate depreciation, account for asset disposals, prepare associated journal entries and ledger accounts, and prepare an Asset Register.

15-2 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson KEY TERMS Accumulated depreciation Asset Register Carrying amount of asset sold Current assets Depreciation Disposal of asset

15-3 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson KEY TERMS cont… Non-current asset Proceeds from sale of asset Profit or loss on disposal Reducing balance method of depreciation Register of property, plant and equipment

15-4 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson KEY TERMS cont… Residual value Straight line method of depreciation Sum of the digits method of depreciation Trade-in value Units of use method of depreciation

15-5 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DEFINITIONS Accumulated depreciation is the total depreciation charged to date and is deducted from the asset in the Balance Sheet. An Asset Register is a complete record of individual assets. The carrying amount of asset sold is the combination of the cost value of the asset and the accumulated depreciation to the date of sale into one account, which is closed to the Profit and loss account.

15-6 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson Definitions cont… Current assets are assets that are expected to be converted to cash within a 12-month period. Depreciation is the amount charged as an expense against revenue earned by the asset over its useful life. Disposal of asset account brings together the original cost of assets, accumulated depreciation, amount received on disposal and profit or loss on disposal.

15-7 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DEFINITIONS cont… Non-current assets are expected to be retained by the business for periods in excess of 12 months. Profit or loss on disposal is the amount calculated in the disposal account. Reducing balance method of depreciation involves the uniform percentage of depreciation being applied to the written down value of the asset.

15-8 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DEFINITIONS cont… Register of property, plant and equipment contains a complete record of individual assets. It is manual or computerised. Residual value is the amount the asset is expected to be sold for after the end of the useful life. Straight line method of depreciation involves allocating the depreciation cost evenly over the life of the asset.

15-9 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson NON-CURRENT ASSETS Acquired for use in the business Not for resale Expected use more than 12 months; for example: –Buildings –Plant and equipment –Motor vehicles –Office furniture –Shop fittings –Computer equipment

15-10 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson CAPITAL COST OF NON- CURRENT ASSETS Cost of getting the asset operational Associated cost added to cost of asset; for example: –delivery charges –installation costs –integrated software in computer systems. Costs add to the value of an asset before depreciation is calculated

15-11 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson AUSTRALIAN ACCOUNTING STANDARDS Depreciable amount to be allocated from time asset is first put to use.

15-12 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DEPRECIATION Recorded in General journal 30 JuneDepreciation$$$$ Accumulated depreciation$$$$ Recording depreciation expense for year ended…..

15-13 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson Depreciation cont…

15-14 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DEPRECIATION ACCOUNTS Depreciation expense account –Closed off to Profit and loss account at financial year end –Depreciation expense debited to this account Accumulated depreciation account –Shows total amount of depreciation accumulated since asset first used –Not closed off –Balance Sheet account

15-15 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson BALANCE SHEET Record of assets Assets shown at original cost Deduct accumulated depreciation Shows asset net value

15-16 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson METHODS OF DEPRECIATION ‘Units of Use’ method (based on items produced) ‘Sum of Digits’ method ‘Straight-line’ method ‘Reducing Balance’ method No particular method specified by Accounting Standards

15-17 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson METHODS OF DEPRECIATION cont… Australian Tax Office allows two methods to calculate deductions: –‘straight line’ (prime cost) method –‘reducing balance’ method.

15-18 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson STRAIGHT LINE METHOD

15-19 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson REDUCING BALANCE METHOD

15-20 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson DISPOSAL OF DEPRECIABLE ASSETS

15-21 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson STEPS TO DISPOSE OF ASSET 1.Calculate depreciation to date of sale. 2.Open Disposal account in ledger. 3.Transfer asset cost of Disposal account.

15-22 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson STEPS TO DISPOSE OF ASSET cont... 4.Transfer accumulated depreciation to Disposal account. 5.Credit Disposal account with money received for asset. 6.Profit or loss is calculated on difference between debits or credits.

15-23 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David Willis By Kaye Watson ASSET REGISTER Detailed information on individual assets Functions –Internal control identifies asset and location –Shows complete history for individual assets –Allows access to information used to calculate depreciation