revision- depreciation. lesson objectives £ to be able to explain the two methods of depreciation...
TRANSCRIPT
Revision- Depreciation
Lesson Objectives
£ To be able to explain the two methods of depreciation
££ To be able to identify why a provision for depreciation is required
£££ To be able to record the sale of an asset
Starter Activity1. What is a doubtful debt?A. A debtor that cannot pay the business2. What is a bad debt recovered?A. When a business has written off a debt, but the debtor pays up.3. Why may a debtor pay up if debt has been written off?A. Debtor wants to trade with them in the future, does not want a bad
reputation4. Why does a business account for depreciation?A. To provide a realistic cost of an asset5. What is the difference between straight-line and reducing-balance
methods of depreciation?A. Straight= Same amount is removed from the asset each year
Reducing= Amount of depreciation changes each year6. What is the difference between capital and revenue expenditure?A. Capital= Money spent on fixed assets, intended for future use
Revenue= Money spent on running costs, not intended to be kept for the long term
Depreciation
Straight-line
Easy to calculate Even depreciation
charge each year Asset will be
considered worthless in the end
Reducing-balance
Complex to calculate More realistic
compared to S/L % is always taken
from the value of the asset
Recording Depreciation A provision for depreciation is created in the
general ledger, this will contain all of the charges for depreciation over the financial period.
At the end of the period the total is recorded:Dr – Profit and loss account (expense)Cr – Provision for depreciation account (liability)
Depreciation accumulates in the provision for depreciation account until the asset is sold or scrapped
Recording The Sale Of A Fixed Asset1. Eliminate the original cost of fixed asset from
the ledger2. Eliminate the accumulated depreciation on
that fixed asset3. Record the amount received for fixed asset4. Was a profit or loss made on the asset? A fixed asset disposal account will have to be
created, this account shows the profit or loss made on the item when closed.
Profit or loss is then transferred to P&L as a gain or a loss
Murray Traders
Murray traders purchased office equipment on 1st Jan 2005 for £12,000. The equipment was depreciated by 25% using the straight line method on the 31st Dec 2005 and 2006.
On 17th May 2007 the equipment was sold for £2,300
Record the disposal of the fixed asset in the businesses ledger
Use the following ledgers
Office Equipment at Cost
Provision for Depreciation Account
Jan 1 05 Bank 12,000
Dec 31 05 P&L 3,000
Dec 31 06 Bal c/d 6,000 Dec 31 06 P&L 3,000
6,000 6,000
Jan 1 07 Bal b/d 6,000
Record the original cost of the equipment
Record the depreciation for the two years 2005 and 2006
Balance the provision for depreciation account
Need Some Help?1. Prepare an “Office Equipment Disposal Account”2. Transfer the cost of the office equipment to the
disposal account (mirror move)3. Transfer the accumulated depreciation charge to the
disposal account (mirror move)4. Record the receipt of the cheque in the disposal
account (income)5. Balance the disposal account. Balance will show a
Profit (DR balancing figure) or Loss (CR balancing figure), this is transferred to the Profit & Loss account.
6. Murray traders make a loss on the sale of the asset = CR entry.
Office Equipment Disposal Account
May 17 Disposal 12,000 May 17 Depreciation 6,000May 17 Bank 2,300May 17 P&L (loss) 3,700
12,000 12,000
Quick recap- Errors not revealed by a trial balance. Name them…
1. Commission
2. Reversal
3. Omission
4. Principle
5. Original entry
6. Compensating
Explain each with an example
CROPOC
Commission- Correct amount entered into correct side of wrong account
Reversal of entry- Correct amounts entered into the wrong sides of account
Omission- Transaction missed from ledgers Principle- Transaction is posted to incorrect class of
account, but on correct side Original entry- Amount is entered wrong Compensating errors- Errors made on both side
that equal the same