Depreciation (172) SYNOPSIS. Introduction Definition Features Causes of Depresaisn Objectives of Desi Accounting ‘Accounting Dep Methods) of Depreciation Practical Problems Review Question._1%s Method : Under this method, depreciation is record if Dect J ewe! ac. Flowing are the joural ents to record deme direct method. =e se chase of Asset on cash/cheque/credit asset Ac (Cost Price + Incidental Exp)...0..Dr x To Cash’BankPartys Alc “ (Bef Purchase of asset on ) “fecord Depreciation at Year End paneetion Ae enc ee ee Xx. To Asset Alc. xX (Be. depreciation charged) Depreciation to P & L Profit & Loss Ac. eae Dr. xx To Depreciation Alc. ro (Be. amount of depreciation transferred to P & L Ave) Gale of Asset. a, Realising the sale ‘CashBank Alc. (Selling price] sees To Asset A/c. xx (B.e. for sale of asset) } Depreciation til the date of sale Depreciation Alc... eecthanial xx To Asset AC. oe | | Betfor depreciation charged till the date of sale) | Je Profit on sale of assets Asset Alc. eA. XK To Profit / Loss Alc. xx (Being the loss on the sale of asset) | [7 Profit / Loss Ave Bs Des XX To Asset Alc. xX (Being the entry for Profit/loss on the sale of asset) METHODS OF CHARGING DEPRECIATION (i) STRAIGHT LINE METHOD : This method is also known as original cost method or straight line method. This method takes into account (2) the original cost of the asset, (b) the estimated useful life of the asset, and (€) the estimated scrap value or the residual value of such asset.1-01-2001 Dep 10%, 12m, SLM 01-01-2002 Dep 10%, 12m, SLM 01-01-2003 “pis method considers the charge for repairs and renewals. Under ti ‘Mihod, depreciation decreases year by year, while repairs and renewals increasing. Sharges 9° © .¢ total expenditure remains more or less constant, More or less Thus, the tof fal amount is charged to each year's profit and loss account for the same Smount for service provided each year by the asst its admitted and accepted by income tax authorities ‘Tere i no need for separate calculations for any addition during the year Tipe percentage is calculated on the total book value ofan asset atthe end ofthe year irrespective of the fact whether there are additions or not during the year: tages It takes a very long time to reduce the value of assets to its scrap value, unless the initial rate of depreciation is kept very high By the passing of time depreciation charges go on decreasing as the ‘alealation of depreciation is made on diminishing value of the asset. The Diminishing Balance method is followed for those assets which have a long life and also requires plenty of repairs and renewals e.g. Buildings, Plant and Machinery, Fumiture. (98 PRACTICAL PROBLEMS : .1. Anil purchased following plant and machinery on various dates: 1-1-2006 % 50,000 1-7-2007 % 20,000 1-10-2007 % 40,000 1-4-2008 60,000 31-12-2009 21,00,000 On 1-7-2009 he sold the machine bought on 1-1-2006 for € 40,000 writes off depreciation, on the fixed instalment system which he has to be 10% per annum of the original cost. Machinery account in the ledger of Anil for the years 2006, 2007, 009,Anil’s Ledger Machi acon [3] nomt ical Pao [5] Ae 2006 50,000| Dec. 31 | 50,000, 2007 45,000| Dec. 31 20,000 40,000 1,05,000 | 2008 98,000| Dec. 31 60,000 58,000 | 2009 1,42,500 | July 1 1,00,000| Dee. 31 7,500 2,50,000 1,985,000 01-07-07 | 01-10-08 20,000 | 40,000 1) Depreciation for 2006 2) Depreciation for 2007 4) Sale of Asset 5,000 01.01.06 Dep. 10%12m 5,000 01-01-07 Dep.10% 12m 1,000 01-01-08 Dep.10% 12m 01.01.091008 a —_179 sation for 2 Dep.10% 6m — pare 2 _ 5000 01.07.09 em im 00002 B50 BY 30,12, 2000 Sling price 000 700 "12 40,000 30,32 4,000 aa 49.000 * 700" 1 7.500 oe 4,500 5) De ciation «0000 700" 12 = rersciatian tox 2009 15,500, 2,000 4,000 6,000 12000 on 1-1-2000, Arya Ltd. purchased a machinery for £12,00,000. On 1.7. 2002 a part of machinery purchased on 1-1-2000 for ® 80,000 was sold for? 45,000 and a new machinery at a cost of &1,50,000 was purchased on the same date. The company has adopted the method of providing 10% p.a. depreciation on the original cost of the machinery, Machinery A/c Cr. Particulars zt Date | Particulars z To Bank Alc 12,00,000/31-12-00 |By Depreciation | 1 20,000) By Balance cid | _10,80,000 12,00,000 12,00,000. [To Balance b/d | — 10,80,000|31-12-01 |By Depreciation | 1,20,000) By Balance cid | 9,60,000 10,80,000 ‘To Balance bid | 9,60,000|01-07-02 |By Bonk 745,000 {To Bank 1 ,50,000|31-12-02 |By Depreciation | 4,000) By Profit & Loss| 15,000 Alc (loss) By Depreciation] 1.19500 (WN2) By Balance cd | _9.26,500 11,10,000| 11,10,000|Introduction to Financial Accounts __hine 1. /f 4 of machine on el + Depreciation @ 10% on WDV on 1-7-2002 Less: Sale Price Loss on sale of machine (2) | Depreciation for the year 1999 (other than machine sold (12,00,000 - 80,000) x 10% 1,50,000 x 10% for 6 months cost for 2 yeas (80,000 » 10% x 9 ar & Tis. @.3. Manohar & Co. purchased folowing plant and machineries on Bay mentioned hereunder: - dg Date Amount Date Ta Yet Jan., 2001 5,000 | Ist July, 2002 Bt Ist April, 2002 2,000 | 1st April, 2003 4, On Ist duly 2004 they sold the machine bought on Tat Jan ya % 4,000. fy They unite off depreciation on the Reducing Balance Method @ ayy annum Prepare machinery account in the ledger of Manohar & Co. forthe yeas 2 2002, 2003, and 2004, 7 Solution : De Machinery A/c i Deis | Paricwars [J.[Amount Date | Fariculars Tin 2001 200% eH Jan. |To Bank Ale 5,000|Dec.31 |By Depreciation Ne| | —igu Dec.31 |By Balance eld 5,000 2002 2002 Jan1_ | To Balance bid 4,000| ee 31 |By Depreciation Ae] | 13 Apel |To Bank Ale 2,000 By Balance cfd au uly 1 |To Bank Alc 4,000 10,000 2003 2003 Jan.1|To Balance bit Dec.31 tation Ac] | 2A ‘Apr1 | To Bank Alc | By Devwee 15 ByBalance cid | |_MS 14,500, 2004 12004 co JJan.1 |To Balance bifd 400) E July 1 | By Bank Ale i Dec:31 B Profit & Loss Dec.31 | By Depreciation Ae a 4) |____|Dee.31 | By Balance cfd sa 13,596 jaiet4. 4) Sale of Asset 01-01-2001 5,000] Dep.20% 2001 1,000 01-01-2002 4,000) Dep.20% 2002 800 01-01-2003 3,200 Dep.20% 2003 640 01-01-2004 2,560) Dep.20% 6m 256 01-07-2004 2,304 Sod 4.000} Profit 1,696 5) Depreciation for 2004 old BY, 11,900 wWDV. 2,560 9,340 20 12 1,868 New = 9,340 x Too “12 New = 1,868 New Trading Company, Mumbai purchased Machinery for % 90,000 on 1" ‘April, 2008. On 1 October 2008 additional Machinery was Purchased for 7° 60,000. On 1* October 2010 the Company sold the Machinery purchased on 1* October 2008 for & 40,000. Depreciation is to be charged at 10% p.a. under Straight Line Method on 31* March every year. Prepare Machinery Account and Depreciation Account for three years ie. 2008-09, 2009-10 and 2010-11. Date [Particulars ‘LF [Amt © [Date [Particulars UF [Ami © cS 2008 er |To Bank Are 90,000| Mar 31 | By Depreciation A/c 12,000 [O21 | To Bank Ne 60,000 Mar 31 | By Balance eid 138,000 4,50,000 150,000] 4182. Introduction to Financial 'Ape.1| To Balance bid 2010 ‘Apr.1 | To Balance bid 138,000] 1,38,000 123,000) /Mar31 | By Balance Ave 2010 (Oct |By Depreciation Ae Oct [By Profit & Loss Ave 2010 Mar-31 | By Depreciation Ave {Loss or Sales) Joct1 | By Cash/Bank Ave (Sole proceeds) 2011 Mar31_ | By Depreciation Ave By Balance c/a To Balance bid 163,000 Dr. Depreciation Account Date [Particulars JF[Amt © [Date [Particulars 2009 "2009 ‘Mar.31 To Machinery Ae 112,000|Mar.31 | By Profit & Loss A/c 12,000 2010 2010 Mar31|To Machinery Ale 115,000] Mar.31 | By Profit & Loss Ave 15,000 2010 JOct.1 | To Machinery Ale 3,000 2011 2011 /Mar.31| To Machinery A/c 9,000 Mar.31 | By Profit & Loss A/c 12,000} Working Note: Calculation of Depreciation and Profit / Loss on Sale of machinery Year / Particulars Machinery! Machinery Il | Depreciation] | (2008-09 ‘90,000 60,000) oe Less: 10% Depreciation 9,000 3,000| 12,000, J 208 (6 months) fe 2009-10 W.D.V 81,000 57,000 bas Less: 10% Depreciation 9,000 6,000] 15.000] J yy3) [2010-11 WD.V 72,000 51,000 Less: 10% Depreciation 9,000 3,000) 12000] | ans 63,000 48,000 ef Less: Sales Proceeds 40,000 hers |Loss on Sale 8,000 | Q.5. Ankita & company, Solapur bought a Machinery worth & 25,000 on" April, 2004 and paid % 5,000 on its installation. The company depreciate} the Machinery @ 10% p.a. on original cost on 31" March, every yea"0 OMe, 89 1* October 2006 the company peace eee sold the original cost of which 4 bit fhe Machnay or € 10h) for ® 20,000 on the ny 10,000, the company ed Gow Machinery Account and Deprecat late. qo and 2006-07 Siation for the year 2004-05, 2005- 00! it In the book: y In the books of Ankita & Com, Machinery Account - cr. J.F [Amt.% [Date Tpaa = ge oe (Dee _[Parcalns [Amt © ye 25,000] Mar. Pinoomnne | | ammten lmommaenn | | am fhe"| gocasBank "31 |By Balonce ot Pe|7 20,000 z7.000) 2006, 30,000) Mar31 | By Depreciation Alc 3,000) anne 27,000|Mor'31_|By Balanoe va : ir 27,000 ‘24.000 2005, zz.900 ncn 24,000/0cL1_ [By Depreciation Ne 00 re eeveankA 20,000) Oc.1 | By Cash Ave aa |” (Sale Proceeds) JOct1 [By Profit & Loss Ac 00] (Los on Sale) 2007 Mar31_|By Deprecaon Ac 3.000] Mar31_|By Balanee eld sony aoe 44,000 | roptnce a Depreciation Account ry = [iF [Amt ® [Date [Pariculars GF [amet _ | 2005 Ne 3,000| Mar 31_ | By Profit & Loss Ne 3.000 oMachinen 2006 CS inery Ate 3,000|Mar31 |By Profit & Loss Alc 3,000] yea To Machine : a0 s Ne 500 zens Be Jes To Machinery Ae ,000| Mar:31. | By Profit & Loss Ac 3.500] | 3,500 3,500Written down Value Leas, Depreciation in 2006-07 for 6 months _ | =a oe \* Da os on 3132007 es a Remaring Part of the ‘Machinery (30,000 - 10,000) 10% on 20.000 ~ PZ 2 om on € 20,000 of new Machinery for (6 months) = a fist Total depreciation on 313.07 = ia |e Q6. ¥ Ankita Trading Company, Pune Purchased Fumiture on 1* Aan for 25,000. In the same year additional furiture for % 10,9yy 2 October, 2002. ay ‘On 1* October, 2003, the Furniture Purchased on 1* April, 2009 for € 15,000 and on the same date new furniture was purchases i 12,000. i fy The company charged depreciation @ 8% p.a. on Diminishing Ba, Method. re Prepare Furniture Account for 3 years i.e. 200-03, 2008-04, assuming that the accounting year of the company closes on 31* Max every year. In the Books of Ankita Trading Company Furniture Account Re Dr. Date Particulars —[J-F[ Amt. ©] Date | Particulars SF [ay | ar 2002 /2003 tee ‘Ape |To Cash’Bank A/c 25,000|Mar. _|By Depreciation Alc 2a (Oct.1|To Cash Bank A/c 10.000|31 | By Balance cid zany || 35,000 | Mar31 $500 |” 2003 2003 || ‘Apel|To Balance bd 32,600|Oet1 | By Depreciation Ale oy [an (Oct.1| To Cash Bank Alc 12,000) Oct.1 | By Bank /Cash Ac 15040 (Oct.1 | By Profit & Loss Ale 7080] |] — (Loss on Sale) i 2004 | Mar.31| By Depreciation Ale ize] | os Mar 31 | By Balance eld mse 4600 4600) 2004 ‘2008 | |Apr.1| To Balance b/d 20,352 |Mar.31 | By Depreciation Ac He |By Balance c/d 187) |] —save t0 FINANCIAl Accoun ms Fy on Sale of Machinery: eulars eye apr 2004 Sold 04.05 15.06 - 16.07 for. 6 months 2006 —————_ },000 ~ 10,000) 10% on ® 20,000 = " be (6 months) = as us my ine Purchased Furniture on 1* gy? ‘hr addtional fumiture for ® 10g 2 1000 on sure Purchased on 1° Apri, 2002 a, 2 date new furniture was purchases, fer ation @ 8% pa. on Diminishing B 3 years i.e. 200-03, 2003-04, car of the company closes on 31* Na Jita Trading Company > Account Date | Particulars zo | far |By Depreciation Ave 1 [By Babee cid fora ons | ct] | By Depreciation A/c Sit |B Bank Cash Ae tl | By Profit & Loss A/c (Loss on Sale) of 131 By Depreciation A/c + 31|By Balance eid | 6 | 31 By Depreciation A/c 31] By Balance e/d | | fof Depreciation on Machinery and Profit / i a Furniture 1 | Fura - jcaia_| as Faria HY Beprecation a 10,000] —_ a 400 2.400 _tsnom 7 9,600) a rn (or6mont)|_ 716 ~ 22,080) | a 75,000] 10,599] | Lakshmi and company purchased a imported Machine from ‘Machine is ® 12,00,000 and import duty of € 2.50,000 charges ® 25,000. chased a machine for Rs 1,00,000 and incurred instal 12 L i By puted tes nn fe come rs ne smachine® ged on original cost method at 15% Assume the year as Particulars (Credit (ouo1/i2 - 31/12/12) [31/12/12 | By Depreciation (machine 1) 221250 31/12/12 | By Bal eld 12'53,750 [7475.00] 1/2013 - 31/122013) 785,750] 8U2713 | By Depreciation Macine and 2} | 2532 188 1.25,000| 31/12/13 | By Bal od 11,46562 378,750 | 13,78,750) 172014 - 31/12/2014) T7g/14 [By Cash and Bank 500,000 1/8/14 | By Loss on sale 4.03.437 31/12/14 | By Depreciation 166,563) 31/12/14 | By Bal ed 3.765562) 14.46562Inradveton fo Francia! Accou ial Mee ed Working Note: = = [Paes 5006) Tapas {0m 88780 my [Value as on 31.12.2012 eae () Dep. (2013) | 10.32,50¢ Value as on 31.12.2013 re ) Dep. (2014) fe liom ce pana vn as on 31.12.2014 Journal entry for Cash Bank alc Dr. 5,00,000 Loss on Sale of Dr 4,03,437 To Machinery Ale 903,437 On 1/7/2013 Suraj and company purchased a 3,50,000 and installation charges 45,000, Md impor On 1162014 purchased a machine for Rs 1, installation cost of Rs 45,000. 0,009 eet i USA the cot ofthe machine i FS 22.00,000 an Ma, m ay ing On V9I2015 the company purchased another machine _ andthe machinery purchased on V772013 wns so B , Prepare machinery account for 2013-14, 2014.15, 2015 a that dereition is charged on saight line method 6 any isa financial year. 0% and they Solution: Date | Particulars | Debit | Date Paticalan (iors 310814) oa VIRB Te Gh & Bonk [2595000 [SIMBA [By Dapeaaioe suo6n4 \By Barca AD Tae 25,95,000 | tng (01/04/2014 - 31032015) Bea Taié [Toba ba 2400375] 310815 [By Depcn 614 |ToCash& Bank | —1.45,000| ae eel a 1035 |By bat ca : (25.45.375, mee (0170472015 - 317032016 ___““8 Va2015] To Bal bia 22.73,792] V92O1S | By Cosh & Bark Voanis}Tocesstsark | “3.00000| 1oants [eee a 31/08/16 | By Depreciation machine | 1818 3170976 |, 2nd 3) | By Bal ct | awe, 25,738,792 isn|,00,375 | 2,59,500 12,083 21,40,875 | 132,917 | 31 18,750 20,32,750 |} 27.500 2,82; 2,81,250, ‘1,18,417 oe , Dr. 6,00,000 Dr. 14,32,750 To Machinery Ac 20,32,750 . 1/4/2013 Reliance and company purchase aia schine from on Spain , the cost of the machine "e£ 18'50,000 andl tnport duty o luty of Rs £277,000 ad installation charges 45,000. Reale {3972014 purchased a machine for € 1,00,000 and incum 4 incurred ‘Rratiation cost of & 45,000. arenes imial2015 the company purchased another machine for ® 3,00,000 t 3.00.00 OF the machinery purchased on 1/4/2013 was sold for & 7,00,000. 2 we machinery account and depreciation account for 2013-14, 2014- assuming Peepa15-16 assuming that depreciation is charged on WDV at 10%. The d the year gear isa financial year. lution: SS Particulars Debit % | Date Particulars Credit® Credit & bee Set) loss) pases] | le Cosh & Bonk 22,45 000[31/03/14 | By Depreciation(machine 1) | 2,24,500 24,00375 | 31/03/14 | By Bal. c/d 20,20,500 | '22,45,000) 22,45,000) 42014 - 31/03/2015) Ze) | MA]ToBal. a 20-20 500 [31/08/15 [By Depreciation (machine | 212,925 |ToCash & Bank | 1,45,000] 1,and2) 22,173,792 } 31/03/15 | By Bal. e/d 19,52,575 5,45,375, | 21,65,500| 20,35,000) {52015 - 31/06/2016) 600 00 RIS] To Bal. 6d 79.52,575] 115/15 [By Cash & Bank ae ae 15|ToCash& Bank | 3,00,000]1/5/15 | By losson sale a a 1. | 31/3/16 | By Depreciation (1,2and 3) sect 17} 31/3/16 | By Bal Pook | $500.000/ 31/1275 |and 3 on (machine 2 By bal. see a ™, 26,85 000 | 55,000 |__6a.s00)| 24,16,500 | [__1 51.031 | __4,813 22,65,469 | 50,187] (7.528)| 25,000 42.569 | 4,75,000 asset Dr. 6,00,000 rhkave x (ne Dr. 16,65,469 22,65,469 iste Machinery Ale i fumishes you with the following information, 11-62% Balance in Machinery Account Rs. 1,00,000 on Ist Jan.2017. oo april 2017; he purchased Machinery worth Rs. 50,000, team J charges | 2 OP pt May, Machinery purchased on Ist Jan, 2016; for Rs. 50,000 5 Or old for Rs. 40,000. ‘000 i et Oct, Machinery Purchased on Ist ApriL2017; was sod for Rs. 3.2014, x 47300 « Mochinery at 10% on W.D.V. basls machinery held for part pe oe year is depreciated forthe time itis held oF hinery Account fr the vear ended 31.12.2017. Som] (Mumbai university NOV 2017) ies Machinery A/c 5,85,000) Debit Date Particulars ‘Credit o o 5,00,000| 100,000] 1/5/2017 | By Cash/Bank A/c 40,000) 5,65,469| 50,000] 1/5/2017 | By Loss Ale 3,500) 155.844) 1/5/2017 |By Depreciation Ac | 1,500 1/10/2017 | By Cash/Bank A/c 47,500) 23 1/102017 |By Depreciation Ac | 2,500) wna 31/12/2017 | By Depreciation A/c 5,500) Sores 31/12/2017 | By Bal. old 49,500) 1,50,000) 1,50,000|___ retin Franc Aesoun py, 3 achinery Sold on 1/5/2016 Cost (1/1/2016) 50,000 () Depreciation 45,000) Value as on 1/2017 45,000 (-) Depreciation (2017) (1,500) (45,000 x 10% x 4/12) Ses Value as on 1/5/2017 43,500 Sale Price 40,000 i 3.500 WN 2: Machinery Sold on 1/10/2017 Cost (1/4/2017) 50,000 Less: Depreciation (2,500) (50,000 x10% 6/12) Value as on 1/10/2017 47,500 Sale price 47.500 WN: Depreciation onRemaining Machinery Value as 1/1/2017 1,00,000 (J) Value of Machinery (45,000) Sold on 1/1/2017 iS 55,000 Value of remain machinery ason 1/1/2017 (-) Depreciation 2017 15/500) Value of Machinery as on 1/1/2018 _49,500 Q.12 On ist Jan 2014 Vulture Ltd purchased a machinery for Rs. 58,000. ure L . ad spent Rs. 2000 on its installation. On Ist July 2014 an addition! ‘machinery costing Rs. 20,000 was purchased. S Ist July 2016 the machinery purchased on Ist Jan 2014 was sol kx 28600 and on the same date a new machine was purchased ata cot ‘of Rs. 40000. Show = the Machinery Account for the Ist three calendar years. Writ ten Down Value method for depreciation at 10% per annum. (Mumbai university NOV 2018)mt ———_11, In the books of vulture Machinery A/C Debit (0) 60,000 By Depreciation 20,000/31/1/2014 | By Bal ca 73,000/31/12/2015 | By Depreciation 31/12/2015 | By Bal. ot 73.000 65,700]1/7/2016 | By CasBank 28,600) 40,000/1/7/2016 | By Loss 17,570] 1/7/2016 | By Depreciation 2,430] 31/12/2016 | By Depreciation 3,710) 31/12/2016 | By Bal. cid -53.390| 1,05,700 1,085,700 [Machine 1[ Machine 2 | Machine 3 60,000 a) 40,000) —(6,000) —L,000) 54,000 19,000 —(6.400), 11.900) 48,600 17,100 (2.430) 1.710) 2,000} 46,170, 15,390 38,000 28,600) 17,570 46,170