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depreciation

Decrease in the value of a fixed assets due to use,passage of time, obsolescence etc.

Permanent and continuous decrease in the valueof assets

Def. depreciation represents that part of cost ofa fixed assets to its owner which is notrecoverable when the assets is finally out of useby him. Provision against this loss of capital is anintegral cost of conducting the business duringthe effective commercial life of the assets and isnot dependent on the amount of profit earned


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Def. depreciation accounting is a system of

accounting which aims to distribute cost on

the basic value of tangible capital assets less

salvage value ( if any) over the estimated

useful life of the assets in a systematic and

rationale manner. It is a process of allocation

and not of valuation.


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Need for charging depreciation

To ascertain true results of operation

To present true and fair view of the financial

position

To ascertain the true cost of production

To comply with legal requirement

To accumulate funds for replacement of assets


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Factors affecting the amount of

depreciation

Historical cost

Expected useful life

Estimated residual value


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Methods of recording depreciation

By charging to assets account

By creating provision for depreciation a/c


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Charging to assets A/c

date particulars LF debit credit

Assets a/c Dr

To cash/ bank

( for purchasing assets)

Depreciation a/c Dr

To Assets A/c( for changing depreciation)

P&L a/c Dr

To Depreciation

( for closing Deprecation)

Cash/ Bank a/c Dr

To Asset a/c

Assets A/c Dr

To P&L a/c

(Transfer of profit)

P&L a/c Dr

To assts

(transfer of Loss)


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Creating provision for depreciation

date particulars LF Debit Credit


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Assets A/c Dr

To cash

( for purchasing assets)

Depreciation A/c Dr

To provision for depreciation(for charging depreciation)

Asset disposal A/c Dr

To Assets

( for selling assets at original cost)

Provision for depreciation A/c Dr

To assets disposal A/c( transfer of accumulated depreciation)

Cash/ Bank a/c Dr

To assets disposal a/c


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Assets disposal A/c Dr

To P&L a/c

( in case of profit)

P&L a/c Dr

To assets disposal A/c( in case of loss)


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problem

Mr X purchased a Machine on 1/4/2010 for Rs

90000 and spend Rs 10000 for its transporting

and erecting. On 31/3/2011 he sold the

Machine for Rs 82000. Record the following

transaction in the books of Mr X assuming the

depreciation rate is 20 % per annum. Record

this by both the methods and prepare theledgers.


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Method of charging depreciation

Straight line method (SLM)

Original cost residual value / expected useful

life of the assets

Original cost 100000, residual value 10000,

useful life 10 years then rate of depreciation

is 9 %


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Advantages of this method

Easy to understand

Easy to calculate


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disadvantages

Not scientific: initial stages depreciation is

more


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problem

Purchase

price

Erection

cost

Residual

value

Expected

life in years

Date of

purchase

Machine A 100000 10000 15000 10 1/10/2010

Machine B 50000 5000 7000 5 1/1/2011

Calculate depreciation on Machine A and B for the year 2010-11


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problem

On 1/10/2008 X purchased a new machine for

Rs 50000 and spend Rs 20000 for its

installation. The useful life of the machine is 5

years and its residual value is expected to beRs 10000. On 1/7/2010 the machine was sold

for Rs 55000. Prepare the machine A/c for the

year 2008-09, 9-10 and 10-11 by charging toassets a/c method.


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Written down value (WDV)

Rate of depreciation remains the same but

depreciation is charged on the written value

every year.

This method is more scientifically as later

years repairs is more

As the assets gets old the depreciation

decreases


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disadvantages

More difficult to calculate ( i.e. the rate )

It takes a lot of years to write off an assets

It does not provide for the replacement of theassets


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problem

On 1/10/2008 X purchased a truck for 500000

and spend 200000 for making its body. On

1/10/2010 the truck was sold for Rs 300000.

Prepare the truck A/c for the year 2008-09,9-10, 10-11. depreciation is to be charged @ 20

% on written down value.


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problem

Previous problem prepare all the ledgers.

Method to be followed is by creating provision

for depreciation a/c.


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Bills of exchange

Cash sales: not always possible

Credit sales: fund gets blocked, higher risk of

bad debts, tendency of finding faults i.e..

Goods are defective


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definition

a bill of exchange is an instrument in writing

containing an unconditional order, signed by

the maker, directing a certain person to pay a

certain sum of money only to, or to the orderof a certain person or to the bearer of the

instrument Negotiable Instrument Act


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features

The terms and conditions are specified

The amount of money cannot be altered

The date of payment is certain Drawee is the person on whom bill is raised. If

he accepts it he is bound to make the

payment

Payee: the payee makes the payment.

Generally the Drawee and payee are the same


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Advantage of bill of exchange

Planning: the drawer and Drawee knows when

the payment is due so better planning is

possible.

Proof of debt: the receiver of money is secure

about his payment.

Liquidity is maintained: the drawer cab

discount the bill and receive payment

immediately.

Easy transferability: can be transferred from

one person to another


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Basic terms

Bills receivable: if payment is receivable

Bills payable : if payment is payable

Due date of bill of exchange: the date onwhich the payment is to be paid


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journal

A sells Rs 10000 worth of goods to B on

1/4/2011. On 2/4/2011 A draws a bill for

10000 on B which B accepts. The due date for

the same is 2/6/2011. On the due date Bmakes the payment. Pass the journal entries


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In the books of A


1/4/2011

2/4/2011

2/6/2011

B a/c debit

To sales a/c

Bills receivable a/c Debit

To B a/c( on raising the Bill)

Bank A/c Debit

To bills receivable A/c

( on receiving payment)

10000

10000

10000

10000

10000

10000


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In the books of B


1/4/2011

2/4/2011

2/6/2011

Purchase A/c Debit

To A A/c

A a/c Debit

To Bills Payable( on accepting the Bill)

Bills Payable A/c Debit

To Bank A/c

( on making the payment)

10000

10000

10000

10000

10000

10000


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Discounting with the bank


Bank A/c Debit

Discount on Bills a/c Debit

To Bills receivable


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Endorsing the bill in favour of a

third partydate particulars LF Debit Credit

C A/c Debit

To Bills receivable a/c

( on endorsement)

Bank A/c DebitTo C A/c

( on receipt of payment)


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Dishonor of bill


B A/c Debit

To bills receivable A/c

If a had discounted the bill or endorsed

the bill

B A/c Debit

To Bank/ To C A/c


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Noting charges


B a/c Debit

to cash

( if paid by A)

B A/c DebitTo Bank

( if discounted by the bank)

B A/c Debit

To C A/c

( if endorsed to C and C pays for it)


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Insolvency


B A/c Debit

To Bills receivable/ Bank/ C

Bank a/c Debit

Bad debts A/c DebitTo B A/c

( the amount not received is treated as

bad debts)


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problem


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journal


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