concepts related to depreciation fixed assets
TRANSCRIPT
Directorate: Curriculum FET
Gr 10 Accounting Term 2, 2020 1
GRADE 10 ACCOUNTING TERM 2 : WEEK 7
TOPIC : Depreciation; Adjustments; Pre- & Post Adjustment Trial Balance
You already know about …
basic accounting concepts e.g. income, expenses, profit and loss | GAAP principles |
year-end adjustments | journal entries | trial balance
This lesson will improve your knowledge and skills about ...
depreciation | historic cost principle | pre- and post- adjustment trial balances
Note: For more information please refer to your TEXT BOOK about DEPRECIATION and pre-
and post-adjustment trial balances OR refer to the following digital resources:
Lucem Publishers Gr 10 Teachers Guide (text book & workbook in one) bit.ly/Gr10LucemAE (Pg. 134 – 152)
Via Africa Gr 10 Study Guide
(Eng only)
http://bit.ly/Gr10Via
Gr 10 Study& Master videos on the General Journal / Adjustments
Gr10S&M K&V
CONCEPTS RELATED TO DEPRECIATION
Fixed Assets are valuable items used to generate income
over a long period (1 year+), e.g. Vehicles, Equipment
P = Cost of obtaining the asset (original (historic) cost price)
S = Salvage or replacement value after a number of years
n = Life span of the asset (no. of years the asset will be useful)
o Fixed assets decrease in value over time due to wear
and tear.
Depreciation = the decrease in value over time
o is calculated annually at the end of a financial year and
o written off annually against the value of the asset as an
'expense' in a specific accounting period.
Accumulated depreciation = the total depreciation
expense written off over the life span of the asset
o Each asset item has an 'accumulated depreciation' total
to be offset against the historic cost of the asset in the
balance sheet.
o It is a negative asset as it decreases the value of the
asset item.
Carrying value (book value) is the 'net' value of the asset,
i.e. Cost price - Accumulated Depreciation.
Basic example:
Vehicle Cost R100 000
Depreciation per year: R10 000 p.a.
Vehicle's carrying value after 5 years:
100 000 - (5 x 10 000)
= R50 000
R50 000 can also be the 'salvage' / replace-
ment value if the vehicle needs to be replaced
by a more economical/useful vehicle.
Gr 10 Accounting Term 2, 2020 2
DEPRECIATION METHODS (at school level)
Fixed amount method
(on cost price)
OR
Straight line method
OR
Fixed Instalment method
A fixed amount OR a fixed percentage of the cost price is written
off annually during the life span of the asset.
The depreciation amount is the same every year over the useful life
of the asset.
Accumulated depreciation will increase every year with the same
amount.
The useful life span of some assets are relatively short and they may
lose value 'quickly' over time, e.g. Computers (quick technological
advances may result in a large drop in value over a short period)
Diminishing balance
method (on carrying value)
OR
% of Carrying / Book value
Depreciation is calculated on the diminishing balance (carrying value)
of the asset.
The depreciation amount will decrease every year.
Accumulated depreciation will increase every year with a smaller
amount.
The depreciation amount on one asset item will initially be high, but
will gradually decrease.
The useful life span of the asset is relatively longer and will drop in
value over a longer period, e.g. Equipment (the value of office desks
and chairs will decrease at a 'slower' pace (low wear and tear) and can
be used for a long time)
EXAMPLES for applying the two depreciation methods
1. Cost price / Straight line / Fixed installment method
Year Cost price Depreciation
Rate(%)
Depreciation
(R) Calculation
Accumulated
Depreciation
Carrying
value
2017 R200 000 20% R40 000 R200 000 x 20% R 40 000 R160 000
2018 R200 000 20% R40 000 R200 000 x 20% R 80 000 R120 000
2019 R200 000 20% R40 000 R200 000 x 20% R120 000 R 80 000
2. Diminishing balance / Carrying value / Book value method
Year Cost price Depreciation
Rate(%)
Depreciation
(R) Calculation
Accumulated
Depreciation
Carrying
value
2017 R200 000 20% R40 000 R200 000 x 20% R 40 000 R160 000
2018 R200 000 20% R32 000 R160 000 x 20% R 72 000 R128 000
2019 R200 000 20% R25 600 R128 000 x 20 % R 97 600 R102 400
Internal control measures for fixed assets
Physical safeguarding of assets, e.g. lock up facilities, security measures such as alarms, etc.
Proper authorisation required for acquisition and use of fixed assets
Detailed records of fixed assets and their use should be maintained – fixed asset register
These records to be checked periodically by physical inventory count or inspection
Lost, stolen, or destroyed items must be reported immediately and written off - keep records updated
Depreciation policies must be established and documented, especially the method to be applied
Any movements of fixed assets should be recorded promptly in the appropriate journal
New vehicle! Replacement value?
Depreciation
Gr 10 Accounting Term 2, 2020 3
DEPRECIATION ENTRIES AT THE END OF A YEAR (ADJUSTMENT)
PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2019
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Vehicles 420 000
Equipment 86 000
Accumulated depreciation on vehicles 105 000
Accumulated depreciation on equipment 12 900
Adjustment: Provide for depreciation as follows:
on vehicles at 25 % on the cost price
on equipment at 15 % on the diminishing balance
Calculation :
Vehicles Equipment
R420 000 x 25 % x 1yr = R105 000 (R86 000 – R 12 900) x 15 % x 1yr = R10 965
Accounts to be adjusted:
Dr Depreciation (expense) with R115 965 (R105 000 + R10 965)
Cr Accumulated depreciation on vehicles (negative assets) with R105 000 and
Cr Accumulated depreciation on equipment (negative assets) with R10 965
General Journal on 30 June 2019 Fol Debit Credit
Depreciation 115 965
Accumulated depreciation on vehicles 105 000
Accumulated depreciation on equipment 10 965
General Ledger
Dr Vehicles ( B) Cr
2019 June
30 Balance b/d 420 000
Equipment (B)
2019 June
30 Balance b/d 86 000
Accumulated depreciation on vehicles (B)
2019 June
30 Balance c/d 210 000 2018 July
1 Balance b/d 105 000
2019 June
30 Depreciation GJ 105 000
210 000 210 000
2019 July
1 Balance b/d 210 000
Accumulated depreciation on equipment (B)
2019 June
30 Balance c/d 23 865 2018 July
1 Balance b/d 12 900
2019 June
30 Depreciation GJ 10 965
23 865 23 865
2019 July
1 Balance b/d 23 865
Depreciation (N)
2019 June
30 Accumulated depr. on vehicles
GJ 105 000
Accumulated depr. on equipment
GJ 10 965
115 965
Gr 10 Accounting Term 2, 2020 4
POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2019
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Vehicles 420 000
Equipment 86 000
Accumulated depreciation on vehicles 210 000
Accumulated depreciation on equipment 23 865
NOMINAL ACCOUNTS SECTION
Depreciation 115 965
NOTE: When an asset is purchased during the financial year, depreciation must be written off on a pro rata basis for the financial period i.e. for the period from when it was purchased until the end of the financial period.
Example: A business’s financial year starts on 1 March 2019 and ends on 29 February 2020. Equipment, R48 000 was purchased on 1 October 2019. Equipment is depreciated at 15% p.a. on cost. Calculation :
R48 000 x 15 % x 5/12 = R 3 000 TIMELINE FOR THE FINANCIAL YEAR
Mar 2019
Apr May June July Aug Sep Oct Nov Dec Jan Feb 2020
5 months
ACTIVITY 1
The information provided below relates to Giant Stores for their FIRST financial year ended 29 February 2020. REQUIRED:
1.1 Show the General Ledger entries on 29 February 2020. 1.2 Show the extract of the Post adjustment trial balance on 29 February 2020.
Extract from the Pre-Adjustment Trial Balance on 29 February 2020
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Vehicles 162 720
Equipment 29 520
Additional information:
A. A new vehicle was purchased for R162 720 cash on 30 November 2019 and properly recorded.
B. New equipment was purchased on credit on 1 July 2019, R29 520 and correctly entered.
C. Provide for depreciation as follows:
on vehicles at 20 % on the diminishing balance method
on equipment at 10 % on cost
NOTE: The first depreciation provided on a new asset using the diminishing balance method will be calculated in the same way as 'on cost' as there is no 'accumulated' depreciation from previous years to deduct first.
ALWAYS use a timeline in Depreciation calculations
Gr 10 Accounting Term 2, 2020 5
ACTIVITY 1: ANSWER SHEET (Show calculations for depreciation - always!!)
Vehicles New Answer
Equipment New
Answer
1.1 General Ledger
Dr Vehicles Cr
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
Depreciation
1.2 Extract from the Post-Adjustment Trial Balance on 29 February 2020
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
NOMINAL ACCOUNTS SECTION
Gr 10 Accounting Term 2, 2020 6
ACTIVITY 2
REQUIRED: 2.1 Calculate the depreciation to be written off on vehicles and equipment for the financial year ended
29 February 2020.(Remember to use a time line to help you determine the months for pro rata depreciation.)
2.2 Which GAAP principle is applied when assets are depreciated at the end of the financial year? Explain your answer. INFORMATION On 1 March 2019 the following balances appear in the books of Robyn Traders
Extract from the Pre-adjustment Trial Balance on 29 February 2020
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Vehicles 540 000
Equipment 342 000
Accumulated depreciation on vehicles 135 000
Accumulated depreciation on equipment 123 120
ADJUSTMENTS AND ADDITIONAL INFORMATION 1. During the financial year, a new vehicle and new equipment were purchased by cheque. The following
information relates to the transactions: Details Date purchased Cost price
Vehicles 1 May 2019 R216 000
Equipment 1 January 2020 R81 000
2. Depreciation must be written off as follows:
on vehicles at 15 % on cost.
on equipment at 20 % on diminishing balance method.
ACTIVITY 2: ANSWER SHEET
2.1 Calculations: Total
Vehicles Old :
New:
Equipment Old :
New:
2.2
Gr 10 Accounting Term 2, 2020 7
ACTIVITY 3
REQUIRED : Use the information below to complete the Adjustment and Post-Adjustment columns in the Answer sheet.
INFORMATION
The following balances appear in the books of Larah Traders
Extract from the Pre-adjustment Trial Balance on 29 February 2020
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Capital 172 000
Vehicles 300 000
Equipment 53 000
Accumulated depreciation on vehicles 52 800
Accumulated depreciation on equipment 13 000
Trading stock 62 880
Debtors’ control 35 160
NOMINAL ACCOUNTS SECTION
Stationery 4 900
Bad debts 3 200
Adjustments: A. According to a physical stock take on 29 February 2020, the following were on hand :
Trading stock R59 240
Stationery R 240
B. C.Mnisi , a debtor who owed the business R 3 800 was declared insolvent. The business received a cheque for 40c in the rand from his insolvent estate. This has been properly recorded. The balance of his account must be written off as irrecoverable.
C. Depreciation for the year is as follows:
Vehicles at 20 % per annum on the diminishing balance method. A vehicle with as cost price of R 80 000 was purchased on 1 September 2019 and was recorded correctly.
Equipment at 10 % per annum on the cost price. The owner contributed additional equipment of R 28 000 on 1 March 2019. This was the only additional capital contribution, but the transaction was not recorded.
ACTIVITY 3: ANSWER SHEET
Pre-adjustment Trial Balance
Adjustments Post- Adjustment
Trial Balance
Debit Credit Debit Credit Debit Credit
Balance sheet section
Capital 172 000
Vehicles 300 000
Equipment 53 000
Acc. depr. on vehicles 52 800
Acc. depr. on equipment 13 000
Trading stock 62 880
Debtors’ control 35 160
Nominal section
Stationery 4 900
Bad debts 3 200