Depreciable assets

LEARNING UNIT 3
Learning objectives

 Apply the diferent methods of depreciation.

 Make the necessary accounting entries for depreciation.
 Record entries concerning depreciation in the General Ledger and General
Journal.
 Explain the purpose of an asset register.
 Apply the four steps of asset disposal.
 Record entries concerning asset disposal in the General Ledger and General
Journal.
 Prepare the note to the fnancial statement relating to property, plant and
equipment.
Introduction

 Non-current assets are resources controlled by the entity for longer

than one year, as a result of past events from which future economic
benefts are expected or likely to fow into the entity. Almost all non-
current assets fuctuate in value over their lifespan. Whereas some of
the assets might appreciate in value (like real estate), many lose their
value over time. We call this loss in value depreciation.
 The term ‘depreciation’ is the most prominent concept in this learning
module. We will explore the bookkeeping and accounting treatment of
depreciable assets, with special reference to the disposal of these
assets and the calculation of resultant profts/losses on such disposals.
Key terms

 Depreciation refers to the reduction in the value of asset over time.

This is the usage cost of an asset and is regarded as an expense.
 Accumulated depreciation is the sum of all recorded depreciation on
an asset to a specifc date
 Residual value is the estimated value of a fxed asset at the end of its
useful life.
 Carrying value is the cost of an asset less accumulated depreciation,
is also known as the current value or book value.
Methods of depreciation

 The straight-line method: is also known as the cost price method.

According to this method, depreciation is calculated on the cost of the
asset using a predetermined rate of depreciation. However, the
depreciation rate can also be determined by estimating the useful life
of the asset (for example six years)
 The diminishing balance method: is also known as the reducing
balance method or declining value method. According to this method,
the annual depreciation is calculated as a percentage of the carrying
value of the asset.
METHODS OF DEPRECIATION

1 The straight-line method – depreciation is calculated on the

cost price of the asset.
Dep = Cost / Useful Life x time or Dep = Cost x Rate x Time

2 The diminishing balance method – depreciation is calculated

on the carrying value of the asset.
Dep = (Cost – Accumulated Depreciation) x Rate x Time
Calculate the depreciation (Use two
methods): Assuming the year-end is
31 December.
A
 machine was purchased at a cost of R300 000 (Excluding VAT)
on 01 January 2020 with a useful life of 4 years or 25%. Calculate
depreciation for 2022.
 1. straight-line method: R300 000× 25%=R75 000 or
 2. diminishing-balance method:
 2020=R300 000×25%= R75 000
 2021=(R300 000-R75 000)×25%=R56 250
 2022=(R300 000-R75 000-R56 250)×25%=R42 187.50
JOURNAL ENTRY FOR 2022
DEPRECIATION

Date Details Debit Credit

31/12/2022 Depreciation 75 000
(straight Accumulated depreciation 75 000
line)

31/12/2022 Depreciation 42 187.50

(Diminishing Accumulated depreciation 42 187.50
)
 ASSET DISPOSAL

What is ASSET DISPOSAL

Asset disposal refers to the disposal of assets by way of sale, trade-in, donation, etc.

How do we record ASSET DISPOSAL

There are FOUR STEPS involved in recording the disposal of asset.
 RECORDING ASSET DISPOSAL

1 – REMOVE THE COST of the asset from the asset account

2 – REMOVE THE ACCUMULATED DEPRECIATION of the asset from the accumulated

depreciation account

3 – RECORD THE SALE

4 – CALCULATE THE PROFIT/LOSS on the sale of the asset
 THE ASSET DISPOSAL ACCOUNT
ASSET DIPOSAL
DATE DETAILS FOL AMOUNT DATE DETAILS FOL AMOUNT
Accumulated
depreciation on
Acc. dep
Vehicle/ Vehicles/
Equipment/ CP Equipment/ @ date
Machinery Machinery of sale
(step 1) (step 2)
Bank/
Debtors control/
Creditors control SP
(step 3)
Proft on sales of Loss on sale of
Balancing asset Balancing
asset
(step 4) figure (step 4) figure

N.B. 3 PARTS OF INFORMATION REQUIRE TO COMPLETE THE ASSET DISPOSAL

ACCOUNT:
1. COST of the asset 2. ACCUMULATED DEPRECIATION at the date of