Provisions for

Depreciation
Chapter 11
 Definition
The reduction in the value
of a non-current asset is
known as depreciation.
 Why
depreciation?
  Straight line method
 Reducing balance method
 Revaluation method

Methods
 Important terms
Cost Annual
The actual amount of the
asset includes the cost +
Depreciation
any expenses that we pay Amount of depreciation
for before you put the
for the period of the
asset to use.
asset

Accumulated
Net Book Value Depreciation
Total/aggregate amount
NBV = Cost – Accumulated
depreciation of depreciation for the
asset so far
 Accounting

Non Current Asset A/C Provision for Depre A/c SOFP (extract)
Date Details $ Date Details $
Date Details $ Date Details $ $ $

Non Current Asset xx

Less: Acc Depre (x) xx

 Straight Line method
01 Also known as 02 Meaning 03 Formula
Net cost of an asset
Fixed installment 𝐶𝑜𝑠𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
OR
is written off in equal =
method 𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
amounts over its
Original cost method = Rate of depre x Cost
useful life

04 Depre amt 05 Used for 06 Advantages

Assets whose value
The amount of annual Easy to calculate
declines over its
depre will remain same Assets can be written
useful lives.
for all the years off completely.
EG: Furniture
 Reducing Balance method
01 Also known as 02 Meaning 03 Formula
Written down value The value of asset goes on
diminishing year after year,
method
the amount of depreciation = Rate of depre x NBV
Diminishing balance charged every year also goes
method on declining.

04 Depre amt 05 Used for 06 Advantages

Assets which lose most Takes into
The amount of annual
of their value in the consideration that
depre will change
first years of use. asset loses max value in
every year.
EG: Motor vehicle the first years of use.
 Revaluation method

For some assets, its difficult to We use this method ONLY when
maintain detailed records it is not possible to maintain
because they are less in value. detailed records of each unit.

Hence, we use this method

For example: Tools, spare parts,
because they wear off fast and
etc.
we purchase them frequently.

Formula:
Opening + Purchases - Closing
Freehold
Adjustment on Depreciation

Provide depreciation
from the date of
acquisition till the
year ending Ignore the date of
acquisition and charge
depreciation for the
full year
 Entries for Disposal of an Asset
Transfer the cost of the
1 asset to disposal A/C
Asset disposal A/C Dr
Transfer accumulated Asset A/C Cr
depreciation 2
Prov for depre A/C Dr
Asset disposal A/C Cr
Sale price received
3
Cash / Bank A/C Dr
Transfer the profit / loss Asset disposal A/C Cr
on disposal
4
Asset disposal A/C Dr
Income statement Cr
 Entries for Part Exchange
Transfer the cost of the
1 asset to disposal A/C
Asset disposal A/C Dr
Transfer accumulated Asset A/C Cr
depreciation 2
Prov for depre A/C Dr
Asset disposal A/C Cr New asset received in
3 exchange
Asset A/C Dr
Transfer the profit / loss Asset disposal A/C Cr
on disposal Cash / Bank A/C Cr
4
Asset disposal A/C Dr
Income statement Cr
Thanks!
Do you have any questions?

You can send an email at

preranas@dgkhetan.edu.in

This PPT is for educational purposes only

 Cambridge International AS and A Level Accounting

11 Provisions for the depreciation of non-current assets

Activities
Activity 1
a
Provision for depreciation of motor vehicles account
$ $
Year 1 Balance c/d 2 000 Year 1 Income statement 2 000
Year 2 Balance c/d 4 000 Year 2 Balance b/d 2 000
Income statement 2 000
4 000 4 000
Year 3 Balance c/d 6 000 Year 3 Balance b/d 4 000
Income statement 2 000
6 000 6 000
Year 4 Balance c/d 8 000 Year 4 Balance b/d 6 000
Income statement 2 000
8 000 8 000
Year 5 Balance c/d 10 000 Year 5 Balance b/d 8 000
Income statement 2 000
10 000 10 000
Year 6 Balance c/d 12 000 Year 6 Balance b/d 10 000
Income statement 2 000
12 000 12 000
38 Year 7 Balance c/d 14 000 Year 7 Balance b/d 12 000
Income statement 2 000
14 000 14 000
Year 8 Year 8 Balance b/d 14 000

b Statement of financial position extracts

Cost Depreciation Net book value
$ $ $
Year 1: Motor vehicles 18 000 2 000 16 000
Year 2: Motor vehicles 18 000 4 000 14 000
Year 3: Motor vehicles 18 000 6 000 12 000
Year 4: Motor vehicles 18 000 8 000 10 000
Year 5: Motor vehicles 18 000 10 000 8 000
Year 6: Motor vehicles 18 000 12 000 6 000
Year 7: Motor vehicles 18 000 14 000 4 000
Activity 2
a
Provision for depreciation of machinery account
$ $
Year 1 Balance c/d 12 000 Year 1 Income statement 12 000
Year 2 Balance c/d 20 400 Year 2 Balance b/d 12 000
Income statement 8 400
20 400 20 400
Year 3 Balance c/d 26 280 Year 3 Balance b/d 20 400
Income statement 5 880
26 280 26 280
 Answers to activities, practice exercises and exam practice questions: Chapter 11

$ $
Year 4 Balance c/d 30 396 Year 4 Balance b/d 26 280
Income statement 4 116
30 396 30 396
Year 5 Balance c/d 33 277 Year 5 Balance b/d 30 396
Income statement 2 881
33 277 33 277
Year 6 Year 6 Balance b/d 33 277

b Statement of financial position extracts

Cost Depreciation Net book value
$ $ $
Year 1: Machinery 40 000 12 000 28 000
Year 2: Machinery 40 000 20 400 19 600
Year 3: Machinery 40 000 26 280 13 720
Year 4: Machinery 40 000 30 396 9 604
Year 5: Machinery 40 000 33 277 6 723

Activity 3
a Machinery at cost account
2016 2016
$ $ 39
Jan 1 Balance b/d 18 000 May 7 Disposal of 6 000
machinery
Jun 3 Bank 7 000 Jun 3 Disposal of 12 000
machinery
Disposal of 3 000 Dec 31 Balance c/d 10 000
machinery
28 000 28 000
2017
Jan 1 Balance b/d 10 000

b Provision for depreciation of machinery account

2016 2016
$ $
May 7 Disposal of 2 400 Jan 1 Balance b/d 9 600
machinery (2 400 + 7 200)
Jun 3 Disposal of 7 200 Dec 31 Income statement 1 000
machinery
Dec 31 Balance c/d 1 000

10 600 10 600
2017
Jan 1 Balance b/d 1 000
 Cambridge International AS and A Level Accounting

c
Disposal of machinery account
2016 2016
$ $
May 7 Machinery at 6 000 May 7 Provision for depreciation 2 400
cost of machinery
Bank 1 500
Income statement (loss) 2 100
June 3 Machinery at 12 000 June 3 Provision for depreciation 7 200
cost of machinery
Machinery at cost – part 3 000
exchange
Income statement (loss) 1 800
18 000 18 000

Practice exercises
1 a The straight-line method of depreciation is calculated by charging the rate of depreciation
on the cost of the non-current asset. The reducing balance method of depreciation is
calculated by charging the rate of depreciation on the cost of the non-current asset minus
the accumulated depreciation to date before making the charge.

b Piccolo
Income statement for the year ended 31 May 2016
40
$ $
Sales 300 000
Less: cost of sales
Opening inventory 30 000
Purchases $(190 000 − 4 000) 186 000
216 000
Less: closing inventory 42 000 174 000
Gross profit 126 000
Less: expenses
Wages 56 000
Heating and lighting $(17 600 + 1 800) 19 400
Repairs to machinery 5 100
Advertising $(7 000 − 6 000) 1 000
Depreciation of freehold buildings ($80 000 × 4%) 3 200
Depreciation of plant and machinery 11 000 95 700
($76 000 − $32 000 × 25%)
Profit for the year 30 300
 Answers to activities, practice exercises and exam practice questions: Chapter 11

Piccolo
Statement of financial position at 31 May 2016
Cost Accumulated Net book value
depreciation
$ $ $
Non-current assets
Freehold land and buildings 100 000 43 200 56 800
Plant and machinery 76 000 43 000 33 000
176 000 86 200 89 800
Current assets
Inventory 42 000
Trade receivables 14 000
Other receivables (prepaid 6 000
advertising)
Bank 5 500
67 500
Total assets 157 300
Capital and liabilities
Opening capital 150 000
Add: net profit 30 300
180 300 41

Less: drawings $(27 100 + 4000) 31 100

149 200
Trade payables 6 300
Other payables (heat and light) 1 800
8 100
Total capital and liabilities 157 300

c Piccolo should not change his method of charging depreciation. To do so will go against
the concept of consistency. There is no valid reason why a change should be made.
2 a Wilhelmina
Income statement for the year ended 31 March 2016
$ $
Sales 80 600
Less: sales returns 1 590
79 010
Less: cost of sales
Opening inventory 13 000
Purchases 50 914
Less: purchases returns 825 50 089
63 089
(cont.)
 Cambridge International AS and A Level Accounting

Income statement for the year ended 31 March 2016

Cost Depreciation Net book value
$ $ $
Less: closing inventory 16 000 47 089
Gross profit 31 921
Less: expenses
Wages 13 017
Electricity $(1 012 + 300) 1 312
Repairs to machinery 643
Other operating expenses $(1 234 − 180) 1 054
Interest on loan and HP 2 200
$(1 000 + 1 000 + 200)
Depreciation of leasehold property 3 000
($45 000 ÷ 15)
Depreciation of plant and machinery 8 950
($21 000 +
$[30 000 − 6 000] - $9 200 × 25%)
Depreciation of office equipment
($7 000 × 15%) 1 050 31 226
Profit for the year 695

b Wilhelmina
42
Statement of financial position at 31 March 2016
Cost Accumulated Net book
depreciation value
$ $ $
Non-current assets
Leasehold property 45 000 16 500 28 500
Plant and machinery 45 000 18 150 26 850
Office equipment 7 000 3 450 3 550
97 000 38 100 58 900
Current assets
Inventory 16 000
Trade receivables 1 526
Other receivables (other operating 180
expenses)
Bank 1 964
19 670
Total assets 78 570
Capital and liabilities
Opening capital 50 000
Add: net profit 695
50 695
Less: drawings 18 598
32 097
 Answers to activities, practice exercises and exam practice questions: Chapter 11

$ $ $
Non-current liabilities
Loan (repayable 2020) 20 000
Trade payables 973
Other payables (electricity 1 300
and loan)
Loan for machinery (including
accrued interest $200) 24 200
26 473
Total capital and liabilities 78 570

Notes:
• Hire purchase is not on the syllabus. However, the amount due to the company from
whom the machinery was bought is $24 000 $(30 000 − 6 000). This is added on to the
cost of the machinery $(21 000 + 24 000).
• Interest to be paid over the course of HP agreement is $800 (4 × $200) and as the
agreement was for one year and began on 1 January 2016, three month’s interest,

( 3
12
1
)
or 4 × $800 = $200 must be accrued at 31 March 2016.
• The entire loan for the machinery is repayable within 12 months from the date of the
statement of financial position. This means that the whole of the amount is treated as a
current liability.

Exam practice questions 43

Multiple-choice questions
1 D
2 C
3 A

4 A

Structured question
1 a 
Businesses will use different methods of depreciation because non-current assets
lose value at different rates during their working life. For example, a motor vehicle will
depreciate more in the early years of its life. Thus, the reducing balance method of
depreciation is best for this asset. On the other hand, something like office furniture will
lose its value evenly over its life and is depreciated using the straight-line method.
b Asset disposal account
2016 2016
$ $
May 31 Motor vehicles 8 000 May 31 Motor vehicles
at cost accumulated depreciation 4 000
Bank 3 000
Income statement 1 000
8 000 8 000
 Cambridge International AS and A Level Accounting

c i Motor vehicles at cost

000 − 8 000 + 12 000) = $32 000
$(28 
ii Motor vehicles accumulated depreciation
Beginning of year less vehicle sold $(12 000 − 4 000) = $8 000
Depreciation charge for the year $(32 000 − 8 000) × 25% = $6 000
(Add to get) Accumulated depreciation at end of year = $14 000
iii Office equipment at cost
$(20 000 + 2 000) = $22 000
iv Office equipment accumulated depreciation
Beginning of the year $8 000
Assets charged a full year of depreciation $20 000 × 10% = $2 000
1
Assets bought in year and held for only 3 months $2 000 × 10% × = $50
4
(Add to get) Accumulated depreciation at end of year $10 050

44