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O Level Accounting: By: Kashif Chughtai

The document discusses depreciation accounting. It defines depreciation as the cost of the benefit received from a non-current asset over its useful life. Depreciation is accounted for through a journal entry that debits depreciation expense and credits accumulated depreciation. The document describes three methods for calculating depreciation: straight-line, reducing balance, and revaluation. It provides examples of journal entries and calculations for depreciation under each method.

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Affan Ahmed Butt
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111 views11 pages

O Level Accounting: By: Kashif Chughtai

The document discusses depreciation accounting. It defines depreciation as the cost of the benefit received from a non-current asset over its useful life. Depreciation is accounted for through a journal entry that debits depreciation expense and credits accumulated depreciation. The document describes three methods for calculating depreciation: straight-line, reducing balance, and revaluation. It provides examples of journal entries and calculations for depreciation under each method.

Uploaded by

Affan Ahmed Butt
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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O LEVEL

ACCOUNTING
By: Kashif Chughtai
DEPRECIATION

By: Kashif Chughtai


Topic: Depreciation – CAIE Syllabus
Accounting for depreciation and disposal of non-current assets
Define depreciation
Explain the reasons for accounting for depreciation
Name and describe the straight-line, reducing balance and revaluation methods of
depreciation
Prepare ledger accounts and journal entries for the provision of depreciation
Prepare ledger accounts and journal entries to record the sale of non-current assets,
including the use of
Disposal accounts.
Topic: Depreciation
Depreciation:
Is the COST of Benefit, that Benefit which we acquire / get from an asset over its useful life.
AS per Rules:
It’s a systematic allocation of a non current asset cost over its useful life.
Accounting Treatment:
1 - Once charge as an Expense in Income Statement
2 - Secondly deduct from an Asset’s Cost in Financial Position
Journal Entry:
Depreciation Expense DR.
to Accumulated Depreciation CR.
Or, Provision for Depreciation
• Accumulated Dep. Or Provision for Dep. (PFD): this is the TOTAL Depreciation of an asset from the
start of that asset’s life till now
• ( Previous Years’ Depreciation + Current Year’s Depreciation)
Depreciation: Reasons:

Usage
Passage of Time
Wear & Tear
Obsolete / Obsolescence
Out OF fashion / Out dated
Change of technology
Etc…..
Methods To Calculate Depreciation:
1 – Straight Line Method - SLM
2 – Reducing Balance Method / Diminishing Balance Method – RMB
3 – Revaluation Method – RM
1 – SLM: either as % or Formula
The depreciation on COST.
Depreciation is calculative on a NCA’s COST every year
SO the amount of Depreciation will always be SAME per annum.
e.g. Machine Cost $150,000
Rate of dep. 10% p.a.
Year 1: Dep. Cost * % = 150,000 * 10% = $15000 p.a.
Year 2: Dep. Cost * % = 150,000 * 10% = $15000 p.a.
Depreciation:
1 - SLM:
Depreciation = [COST – Scarp Value] / Life
Scarp Value: SV: This is an expected amount on which we will be able to sell that NCA at the
end of its life.
Life: No of Years.

e.g. Cost $150,000


Life = 10 Years
SV = $15000

Dep. = [$150,000 - $15000] / 10 Years = $13,500 p.a.


Example:          
Machine 150000 Rate 10% SLM Dep. 15000

  Year Working Depreciation / Exp in IS Accumulated Dep./PFD NET BOOK VALUE

  1   15,000 15,000 135,000


  2   15,000 30,000 120,000
  3   15,000 45,000 105,000
  4   15,000 60,000 90,000
  5   15,000 75,000 75,000
  6   15,000 90,000 60,000
           
           

* Net Book Value: NBV =


COST - ACCUMULATED DEP.
  Or PFD        
Depreciation:

2 – RBM: Reducing Balance Method or Diminishing Balance Method


Depreciation is calculative on Net Book Value (NBV)
NBV = Cost – Provision for depreciation
Dep. = NBV * % = amount of dep.
So the amount of depreciation per annum decreases. (downfall trend)
e.g. Machine $150,000, rate of depreciation is 10% p.a. by RBM
Year 1 :
Example: 10 % as RBD
Machine 150000 Rate 10% RBM   150,000
Depreciation / Accumulated NET BOOK
  Year Working
Exp. in IS Dep./PFD VALUE

  1 150,000 * 10% 15,000 15,000 135,000

  2 1350000 * 10% 13,500 28,500 121,500

  3 121500 * 10% 12,150 40,650 109,350

  4 109350 *10% 10,935 51,585 98,415

  5 98415 * 10% 9,842 61,427 88,574

  6 88574 *10% 8,857 70,284 79,716


* Net Book Value: NBV = COST - ACCUMULATED DEP. Or PFD
Depreciation
3 – Revaluation Method:
The Depreciation is the comparison of opening Net Book Value with the Closing Net
Book Value along with some given adjustments.
This Revaluation method normally used for those Non-Current Assets which are more
in Quantity but less in value . E.g. Loose Tools
NBV = Net Book Value

Depreciation: Opening NBV at 1 Jan 2020 (loose Tools) $5000


Add: New Purchased Asset (loose Tools) $2000
Less: NBV of Disposed Loose Tools ($800)
Closing NBV at 31 Dec 2020 (loos Tools) (4000)
Depreciation $2200

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