1. Depreciation of Non Current Assets
Concept/Nature
Calculation
Book Keeping Entries (Journal and Ledger)
Effects on Financial Statements (F/S)

2. Definition
An estimated loss per period in the value of a Non Current Asset (NCA).

3. Causes of Depreciation/ (Why NCAs depreciate?)
Usage;
Passage of time;
Wear and tear;
Change in technology (old tech. becomes obsolete);
Insufficiency (expansion of a business could make some NCAs insufficient) etc….

4. Depreciation Methods (A) Straight Line Method (SLM)
(B) Reducing Balance Method (RBM)
/Diminishing Balance Method
(C) Revaluation Method (RVM)

5. (A) Straight Line Method
Depreciation is computed by dividing the depreciable amount of the asset by the expected number of accounting periods of its useful life.
Depreciation = Cost of Asset – Estimated Residual Value
Estimated Useful Economic Life

6. Useful Economic Life
Useful economic life is not equal to physical life
It is the period over which the present owner intends to use the asset

7. Residual Value
It is the amount expected to be received after disposal of the asset
Cost of asset – Expected Residual value = Total amount to be depreciated

8. Example Cost of asset $1200 Residual/scrap/salvage value $200
Estimated useful life 4 years
Annual charge for depreciation
= $1200-$200 4
= $1000 4
=$250

9. (B) Reducing Balance Method / Diminishing Balance Method
Reason
Greater benefit is to be obtained from the early years of using an asset
Appropriate to use the reducing balance method which charges more in the earlier years.
Annual Depreciation = Net Book Value x Depreciation Rate
= (Cost – Accumulated Depreciation) x Depreciation Rate

10. Example Cost of assets $10,000 Residual value $384 Useful life 4 years
Depreciation Rate %

11. Annual Depreciation Year 1 10,000 x 60% = $6,000
= Net Book Value x Depreciation Rate
= (Cost – Accumulated Depreciation) x Depreciation Rate
Year ,000 x 60% = $6,000
Year 2 (10,000 – 6,000) x 60% = $2,400
Year 3 (10,000 – 8,400) x 60% = $ 960
Year 4 (10,000 – 9,360) x 60% =$ 384

12. (C) Revaluation Method
For some small-value assets such as loose tools
Depreciation
= Value at the beginning of the year (Opening
balance) + Purchases in the year – Value at the
end of the year (Closing balance)

13. Depreciation for the year = $1,500
Example
The value of the loose tools changes during 1996 as shown below:
1996
Jan 1
Value of loose tools
$2,000
Dec 31
Purchases in the year
$ 500
Dec 31
Value of loose tools
$1,000
Loose Tools $
Jan 1 Balance b/f ,000
Dec 31 Bank-purchases
2,500 $
Dec 31 P & L ,500
Dec 31 Balance c/f ,000
Depreciation for the year = $1,500

14. Accounting for Depreciation
Journal Entries
Dr. NCA
Cr. Bank/Supplier
Purchase price and other capital expenditure
Dr. Profit and Loss
Cr. Provision for Depreciation-NCA

15. The Journal Dr
($) Cr
($) X
NCA X
Cash/Bank/Supplier
Recording cost of the NCA X
Profit and Loss account (I/S)
Provision for Dep-NCA X
Recording Dep for the current period

16. Example
In a business with financial years ended 31 December. A machine is bought for $2,000 on 1 January Year 1. The estimated useful life is 5 years.
You are to show:
(a) Machinery account
(b) Provision for depreciation
(c) Profit and loss account for the year ended 31 Dec Year 1, 2, and 3.
(d) Balance sheet as at those date
(1) Using straight line method and reducing balance method, at the rate of 20%.

17. Straight Line Method Year 1 Machinery Year 1 $ Year 1 $
Jan 1 Bank ,000
Dec 31 Bal c/d 2,000
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
(2000/5)

18. Balance Sheets as at 31 Dec
Profit and Loss for the year ended 31 Dec
Year 1 $
Less: Expenses
Depreciation - Machinery
400
Balance Sheets as at 31 Dec
Year 1 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
400
1,600

19. Year 2
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
Year 2
Year 2
Dec 31 Bal. c/d
Jan Bal. b/d
Dec 31 P/L
800
(2000/5)
800

20. Balance Sheets as at 31 Dec
Profit and Loss for the year ended 31 Dec
Year 1 $
Year 2 $
Less: Expenses
Depreciation - Machinery
400
400
Balance Sheets as at 31 Dec
Year 1 $
Year 2 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
2,000
400
800
1,600
1,200

21. Provision for dep. – Machinery
Year 3
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
Year 2
Year 2
Dec 31 Bal. c/d
Jan Bal. b/d
Dec 31 P/L
800
800
Year 3
Year 3
Dec 31 Bal. c/d ,200
Jan Bal. b/d
Dec 31 P/L
1,200
1,200

22. Profit and Loss for the year ended 31 Dec$
Year 2 $
Year 3 $
Less: Expenses
Depreciation - Machinery
400
400
400
Balance Sheets as at 31 Dec
Year 1 $
Year 2 $
Year 3 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
2,000
2,000
400
800
1,200
1,600
1,200
800

23. Reducing Balance Method
Year 1
Machinery
Year $
Year $
Jan 1 Bank ,000
Dec 31 Bal c/d 2,000
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
(2000*20%)

24. Balance Sheets as at 31 Dec
Profit and Loss for the year ended 31 Dec
Year 1 $
Less: Expenses
Depreciation - Machinery
400
Balance Sheets as at 31 Dec
Year 1 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
400
1,600

25. Year 2
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
Year 2
Year 2
Dec 31 Bal. c/d
Jan Bal. b/d
Dec 31 P/L
( )x20%
720
720

26. Balance Sheets as at 31 Dec
Profit and Loss for the year ended 31 Dec
Year 1 $
Year 2 $
Less: Expenses
Depreciation - Machinery
400
320
Balance Sheets as at 31 Dec
Year 1 $
Year 2 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
2,000
400
720
1,600
1,280

27. Provision for dep. – Machinery
Year 3
Provision for dep. – Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
Year 2
Year 2
Dec 31 Bal. c/d
Jan Bal. b/d
Dec 31 P/L
720
720
Year 3
Year 3
Dec 31 Bal. c/d
Jan Bal. b/d
Dec 31 P/L
( )x20%
976
976

28. Profit and Loss for the year ended 31 Dec$
Year 2 $
Year 3 $
Less: Expenses
Depreciation - Machinery
400
320
256
Balance Sheets as at 31 Dec
Year 1 $
Year 2 $
Year 3 $
Fixed Asset
Machinery at cost
Less: Provision for Dep.
2,000
2,000
2,000
400
720
976
1,600
1,280
1,024

29. Disposal Account Should be opened when The asset is sold;
The asset is disposed of due to an accident;
The asset is traded in with a new one

30. Accounting Treatment Cost price of the asset sold Dr. Disposal Cr. NCA
Dr. Provision for Depreciation
Cr. Disposal
Depreciation already charged on the assets concerned
Dr. Cash / Receivable
Proceeds received / receivable on the disposal
In case of loss on the disposal (Debit side greater than credit side)
Dr. Profit and Loss
With any loss on the disposal
In case of profit on the disposal (Credit side greater than debit side)
Cr. Profit and Loss
With any profit on the disposal

31. Example
In a business with financial years ended 31 December. A machine is bought for $2,000 on 1 January Year1. The estimated useful life is 5 years. At the start of Year4, the machinery has been sold for $1,070. Show the accounting entries:
You are to show:
(a) Machinery account
(b) Provision for depreciation
(c) Disposal account
(d) Profit and loss account and Balance sheet as at 31 Dec Year4

32. Machinery
Year 4 $
Year 4 $
Jan 1 Bal. b/d ,000
Dec Disposal 2,000
Pro. For Dep.
Year 4 $
Year 4 $
Dec 31 Disposal
Jan 1 Bal. b/d
Disposal
Year 4 $
Year 4 $
Dec 31 Machinery 2,000
Dec 31 Pro. For Dep
Dec 31 Bank ,070
Dec 31 P/L – gain
2,046
2,046

33. Profit and Loss for the year ended 31 Dec$ $
Gross profit X
Less: Expenses
Add: Gains on disposal
Loss on disposal X
E.g. if the machinery was sold for $ 900.
Disposal
Year 4 $
Year 4 $
Dec 31 Machinery 2,000
Dec 31 Pro. For Dep
Dec 31 Bank
Dec 31 P/L- loss on
disposal
2,000
2,000

34. Trade-in-allowance The assets being trade in for a new assets
Accounting entries:
Dr Fixed Assets
Cr Disposal
With the trade-in value of disposed asset

35. Example A company purchased machine for $2,500 each on 1 Jan. Year 1.
It is the company’s policy to provide for depreciation on its machinery at a rate of 20%, with a full year’s depreciation made in the year in which a machine is purchased, but none in the year of sale.
This machine was traded in for new machine which had a cost of $4,000 was purchased on 1 Feb. Year 2.
The trade-in allowance of the old machine was $1,000.

36. Machinery
Year 1 $
Year 1 $
Jan 1 Bank ,500
Dec 31 Bal. c/d ,500
Provision for dep.-Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
(2500x20%)

37. Provision for dep.-Machinery
Year 2
Year 2 $ $
Jan 1 Bal. b/d ,500
Feb Disposal ,500
Feb1 Disposal: trade-
in-allowance ,000
Dec 31 Bal. c/d ,000
Feb1 Bank ,000
6,500
6,500
Provision for dep.-Machinery
Year 1 $
Year 1 $
Dec 31 Bal. c/d
Dec 31 P/L
Year 2
Year 2
Jan Bal b/d
Feb 1 Disposal
Disposal
Year 2 $
Year 2 $
Feb 1 Machinery ,500
Feb1 Dep
Feb 1 Machinery:
trade-in-allowance ,000
P/L (loss on trade in) 1,000
2,500
2,500