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DEPRECIATION

DEPRECIATION. Depreciation of Fixed Assets (Nature and Calculations). Content. Revision: What are Fixed Assets? What is Depreciation ? Causes of Depreciation 2 Methods of Calculating Depreciation Charge per year. Example 1. Example 2. Straight line Method Reducing Balance Method.

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DEPRECIATION

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  1. DEPRECIATION

  2. Depreciation of Fixed Assets (Nature and Calculations)

  3. Content Revision: What are Fixed Assets? What is Depreciation ? Causes of Depreciation 2 Methods of Calculating Depreciation Charge per year Example 1 Example 2 Straight line Method Reducing Balance Method More Examples Exercise 1 Exercise 2

  4. Revision: What are Fixed Assets ? Content • Long life; Used in the business; Not bought for resale; Here are some examples:

  5. What is Depreciation? Content • Depreciation is an expense resulting in a loss of value of the cost of a fixed assets during a period of time.

  6. What is Depreciation? Content • Depreciation is an expense resulting in a loss of value of the cost of a fixed assets lost during a period of time. I bought a computer on 1.1.98 at $10,000 but now its value is only $6,000. Depreciation = ? One year later COST = $10,000 VALUE = $6,000

  7. What is Depreciation ? Content • Depreciation is an expense resulting in a loss of value of the cost of a fixed assets lost during a period of time. I bought a computer in 1.1.98 at $10,000 but now its value is only $6,000. Depreciation = $10,000 - $6,000 = $4,000 One year later COST = $10,000 VALUE = $6,000

  8. What is Depreciation? Content • Depreciation = Cost - Disposal Value

  9. What is Depreciation? Content • Depreciation = Cost - Disposal Value Example 1: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Machine 31-12-96 Disposal value = $800 Machine

  10. What is Depreciation? Content • Depreciation = Cost - Disposal Value Example 1: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Find depreciation in 1996. Machine Depreciation = Cost - Disposal value = ? 31-12-96 Disposal value = $800 Machine

  11. What is Depreciation? Content • Depreciation = Cost - Disposal Value Example 1: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Find depreciation in 1996. Machine Depreciation = Cost - Disposal value = $1,000 - $800 = $200 31-12-96 Disposal value = $800 Machine

  12. What is Depreciation? Content • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Machine 31-12-98 Disposal value = $100 Machine

  13. What is Depreciation? (continued) Content • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Machine Find the amount of depreciation for 3 years. Depreciation = Cost - Disposal value = ? 31-12-98 Disposal value = $100 Machine

  14. What is Depreciation? (continued) Content • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1,000 in 1-1-96. 1-1-96 Cost = $1,000 Machine Find the amount of depreciation for 3 years. Depreciation = Disposal value - Cost = $1,000 - $100 = $900 31-12-98 Disposal value = $100 Machine

  15. Causes of Depreciation Content • Physical Depreciation • Economic Factors • Obsolescence • Inadequacy • The Time Factor • Depletion

  16. 2 Methods of Calculating Depreciation Charges. Content Straight line Method Example 1 Example 2 Example 3 Reducing Balance Method Example 1 Example 2 Example 3

  17. Straight Line Method Content • Depreciation each year =

  18. Straight Line Method (Continued) Content • Depreciation each year = Example 1: Cost of machine in 1.1.1996 = $2,000; Disposal Value in 1.1.1999 = $500; Useful Year (1.1.96 - 1.1.99) = 3 Years. Depreciation charge each year = ?

  19. Straight Line Method (Continued) Content • Depreciation each year = Example 1: Cost of machine in 1.1.1996 = $2,000; Disposal Value in 1.1.1999 = $500; Useful Year = 3 Years. Depreciation charge each year = = $500/year

  20. Straight Line Method (Continued) Content • Depreciation each year = • Example 1 Cost of machine in 1.1.1996 = $2,000; Disposal Value in 1.1.1999 = $500; Useful Year = 3 Years. Depreciation each year = = $500/year 1.1.96 $2,000 (COST) 31.12.96 $2,000 - $500 = $1,500 (NET BOOK VALUE) 31.12.97 $2,000 - $500 - $500 = $1,000 (NET BOOK VALUE) 31.12.98 $2,000 - $500 - $500 - $500 = $500 (DISPOSAL VALUE)

  21. Straight Line Method (Continued) Content • Example 2 A firm bought a machine for $50,000. It is expected to be used for six years then sold for $5,000. What is the annual amount of depreciation if the straight line method is used? A. $7,000 B. $8,000 C. $7,500 D. $6,500 How ?

  22. Straight Line Method (Continued) Content • Example 2 A firm bought a machine for $50,000. It is expected to be used for six years then sold for $5,000. What is the annual amount of depreciation if the straight line method is used? A. $7,000 B. $8,000 C. $7,500 D. $6,500 Depreciation Charge per year: = = $7,500

  23. Straight Line Method (Continued) Content • Example 3 A machine of $20,000 was bought for business use on 1 January 19-1. Au estimated that its useful life is 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 19-3.

  24. Straight Line Method (Continued) Content • Example 3 A machine costing $20,000 was bought for business use on 1 January 19-1. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 19-3. Answers: (a) Annual depreciation of the machine = = $4,000

  25. Straight Line Method (Continued) Content • Example 3 A machine costing $20,000 was bought for business use on 1 January 1991. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 1993. Answers: (a) Annual depreciation of the machine = = $4,000 (b) Accumulated depreciation of the machine = $4,000 3 = $12,000

  26. Straight Line Method (Continued) Content • Example 3 A machine costing $20,000 was bought for business use on 1 January 1991. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Answers: (a) Annual depreciation of the machine = $4,000 (b) Accumulated depreciation at the end of 19-3 = $12,000 Net Book Value = $16,000 Net Book Value = $12,000 Net Book Value = $8,000 Cost = $20,000 -$4,000 Depreciation -$4,000 Depreciation -$4,000 Depreciation 1.1.1991 31.12.1991 31.12.1992 31.12.1993

  27. Reducing Balance Method Content • Annual Depreciation = Book value of Asset Depreciation rate (p.a.) where Book value = Cost of Asset - Accumulated Depreciation

  28. Reducing Balance Method (continued) Content • Example 1: Mr. Chow bought a machine costing $10,000 in 1.1.97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19-7 and 19-8. Cost of machine = $10,000 Answers: 1.1.97 31.12.97 31.12.98

  29. Reducing Balance Method (continued) Content • Example 1: Mr. Chow bought a machine costing $10,000 in 1.1.97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19-7 and 19-8. Cost of machine = $10,000 Cost of machine = $10,000 Book Value = $5,000 Depreciation (97) = $10,000 50% = $5,000 Answers: 97 Annual depreciation = $5,000 1.1.97 31.12.97 31.12.98

  30. Reducing Balance Method (continued) Content • Example 1: Mr. Chow bought a machine costing $10,000 in 1.1.97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19-7 and 19-8. Net Book Value = $2,500 Cost of machine = $10,000 Cost of machine = $10,000 Depreciation (98) = $5,000 50% = $2,500 Cost of machine = $10,000 Net Book Value = $5,000 Depreciation (97) = $10,000 50% = $5,000 Depreciation (97) = $10,000 50% = $5,000 Answers: 97 Annual depreciation = $5,000 98 Annual depreciation = $2,500 1.1.97 31.12.97 31.12.98

  31. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the assets. The rate of depreciation is maintained at 30% per annum. Required: (a) The annual depreciation for the year ended 31 December 1992, 1993 and 1994; (b) The net book value of the lorry as at 31 December 1992, 1993 and 1994

  32. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

  33. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

  34. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

  35. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

  36. Reducing Balance Method (continued) Content • Example 2: On 1 January 1992, a lorry costing $100,000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

  37. Reducing Balance Method (continued) Content Answer (a): The depreciation for the year ended 31 December 1992 = $30,000 The depreciation for the year ended 31 December 1993 = $21,000 The depreciation for the year ended 31 December 1994 = $14,700

  38. Reducing Balance Method (continued) Content Answer (b): The net book value of lorry as at 31 December 1992 = $70,000 The net book value of lorry as at 31 December 1993 = $49,000 The net book value of lorry as at 31 December 1994 = $34,300

  39. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 January 1991. It is a common practice to adopt the reducing balance method to depreciate the assets. It is depreciated at 25% p.a. Q1) Find the depreciation for the year ended 31 December 1991? A. $20,000 B. $18,000 C. $12,500 D. $13,500

  40. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p.a. Q1) Find the depreciation for the year ended 31 December 1991? A. $20,000 B. $18,000 C. $12,500 D. $13,500

  41. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p.a. Q2) Find the net book value of the van as at 31 December 1991? A. $40,000 B. $35,000 C. $60,000 D. $61,500

  42. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p.a. Q2) Find the net book value of the van as at 31 December 1991? A. $40,000 B. $35,000 C. $60,000 D. $61,500

  43. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p.a. Q3) Find the depreciation for the year ended 31 December 1993? A. $14,500 B. $11,250 C. $15,500 D. $13,500

  44. Reducing Balance Method(Continued) Content • Example 3 A motor van was bought for $80,000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p.a. Q3) Find the depreciation for the year ended 31 December 1993? A. $14,500 B. $11,250 C. $15,500 D. $13,500

  45. Exercise 1 Content • A computer costs $15,000. It will be kept for four years, and then sold for $3,000. Find depreciation for each of the four years using (a) the straight line method; (b) the reducing balance method, for this method using a depreciation rate of 20 per cent.

  46. Exercise 2 Content • A lorry costs $6,000. It will be kept for five years, and the disposal value is $1,000. Calculate the depreciation for each year using (a) the straight line method; (b) the reducing balance method, using a depreciation rate of 50%.

  47. Double Entries For Recording Depreciation

  48. Modern Method Purchase of a Fixed Assets Dr. Fixed Assets (e.g. Machinery) Cr. Cash/Bank/Creditors (e.g.Wong’s Machinery) Wong’s Machinery Machinery Machinery Wong Machinery

  49. Modern Method (continued) Depreciation charge for this year Dr. Profit and Loss A/C Cr. Provision for Depreciation - Machinery Provision for Depreciation - Machinery Profit & Loss A/C Provision for Depreciation - Machinery Profit & Loss A/C

  50. Modern Method (Continued) Balancing off the Provision Account Bal c/d xxx xxx xxx Bal b/d xxx

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