2. Financial Accounting 1 Lecture – 18 Depreciation “It is a systematic allocation of the cost of a depreciable asset to expense over its useful life”.

3. Financial Accounting 2 Lecture – 18 Classification of Fixed Asset Land Building Plant and machinery Furniture Equipment Vehicles

4. Financial Accounting 3 Lecture – 18 No depreciation is charged on Land. Amount paid for Leased Land is charged over the lease term. It is called amortization.

5. Financial Accounting 4 Lecture – 18 Policies for Recording Fixed Asset Minimum value of item which will be recorded as asset. Depreciation method to be used.

6. Financial Accounting 5 Lecture – 18 Methods of Depreciation Straight Line Method Written Down Value Method (WDV)

7. Financial Accounting 6 Lecture – 18 Cost of Asset – Price at which the asset was initially recorded. Written Down Value / Book Value – Cost minus Accumulated Depreciation.

8. Financial Accounting 7 Lecture – 18 Journal Entries Purchase of asset DebitAsset Account (relevant classification) CreditCash / Bank / Payable Account Charging of Depreciation DebitDepreciation Account (P & L) CreditAccumulated Dep.

9. Financial Accounting 8 Lecture – 18 Written Down Value Method Calculation of Rate Rate = 1 – n RV / C “RV” = Residual Value “C” = Cost “n” = Life of Asset

10. Financial Accounting 9 Lecture – 18 Residual Value – is the price at which the asset is expected to be sold at the end of its useful life.

11. Financial Accounting 10 Lecture – 18 Calculation of Rate Cost= 100,000 Residual Value (RV)= 20,000 Life= 3 years

12. Financial Accounting 11 Lecture – 18 Rate = 1 – 3 20000/100000 = 42%

13. Financial Accounting 12 Lecture – 18 Year 1 Cost 100,000 Depreciation100,000 x 42% (42,000) WDV (Closing Balance) 58,000 Year 2 WDV (Opening Balance) 58,000 Depreciation 58,000 x 42% (24,360) WDV (Closing Balance) 33,640 Year 3 WDV (Opening Balance) 33,640 Depreciation 33,640 x 42% (14,128) WDV (Closing Balance) 19,511

14. Financial Accounting 13 Lecture – 18 Disposal of Asset Cost of Asset= 100,000 Life Of the Asset= 5 Years Depreciation Method= Straight Line Residual Value= Rs. 10,000 Sale Price After Five Years= Rs. 15,000

15. Financial Accounting 14 Lecture – 18 Did we lose Rs. 85,000 (100,000 – 15,000) on the disposal of this asset?

16. Financial Accounting 15 Lecture – 18 Method of Depreciation = Straight line Total Depreciation in Five Years= 18,000 x 5 = 90,000 Book Value After Five Years= 100,000- 90,000 = 10,000 Profit on Disposal= 15,000 – 10,000 = 5,000

17. Financial Accounting 16 Lecture – 18 Recording of Disposal DebitFixed Asset Disposal A/c100,000 Credit Fixed Asset Cost A/c100,000 (with the cost of asset) DebitAccumulated Dep. A/c90,000 Credit Fixed Asset Disposal A/c 90,000 (with the depreciation accumulated to date) DebitCash / Bank / Receivable A/c15,000 Credit Fixed Asset Disposal A/c15,000 (with the price at which asset is sold) [note: one group to appear at a time]

18. Financial Accounting 17 Lecture – 18 Disposal of Asset Account Fixed Asset Disposal Account DEBITCREDIT Cost Account100,000Acc. Dep. Account90,000 Cash / Bank15,000 100,000 105,000P & L Account 5,000 105,000 Total

19. Financial Accounting 18 Lecture – 18 Policy for Charging Depreciation (1)depreciation can be charged on the basis of use, OR (2) full year’s depreciation is charged in the year of purchase and no depreciation is charged in the year of sale.

20. Financial Accounting 19 Lecture – 18 Example An asset is purchased for Rs. 500,000 on Nov. 01, 2001. Depreciation rate is 10% p.a. The Asset is sold on Apr. 30, 2004. Financial Year is July 1 to June 30 Question Calculate the WDV For both policies

21. Financial Accounting 20 Lecture – 18 Depreciation is Charged on the Basis of USe YearOn the Basis of UseRs. 1-11-2001Cost500,000 2001-2002Dep. 500,000 x 10% x 8 / 12(33,333) 30-6-2002WDV466,667 2002-2003Dep. 466,666 x 10%(46,667) 30-6-2003WDV420,000 2003-2004Dep. 420,000 x 10% x 10 / 12(35,000) 30-4-2004WDV385,000

22. Financial Accounting 21 Lecture – 18 Full Dep. In the Year of Purchase YearFull Dep. in year of PurchaseRs. 1-11-2001Cost500,000 2001-2002Dep. 500,000 x 10%(50,000) 30-6-2002WDV450,000 2002-2003Dep. 450,000 x 10%(45,000) 30-6-2003WDV405,000 2003-2004Dep. 00 in the year of sale00 30-6-2004WDV405,000

23. Financial Accounting 22 Lecture – 18 Contents of Fixed Assets Register Different record for each class of assets Date of purchase Detailed particulars of asset Location of asset Record of depreciation