DEPRECIATION
Depreciation applies to Non current assets It is
the
fall the value asset It represents
in
of an
consumed The cost of asset represents
utility an
the utility derived from the asset As the asset is
used its utility is consumed which represents the
depreciation of the asset
Example MV cost 10,000 utility
Year 1 consumed 2000 Depreciatio
8000
Remaining utility
Reasons
for Depreciation
1 wear and tear
unavoidable caused normal
damage by usage
2 absolete
when the asset losses value because
of
technolog cal
advancements
3
Inadequecy
when the asset meet the requirement of
fails to
the user
4 Time
Age
The the asset
age of
Calculation
of Depreciation
Depreciation the consumption of utility is a
concept which perswhynal
isthe amount of
of the deprec
asset ation
same different in business will
standards have
vary International Accounting
recommended different customizable depreciation
models which can be used
by the business
1 Line Method
Straight
In this model the depreciation charged is the same
every year
as the model
implies that the asset
This
provides the utility every year
same
usually
applies
to Buildings furniture etc
Reducing Balance Method
2
In this method we depreciation more
charge
to assets in their intial and less
years depreciat
ion in the later as the asset
years gives higher
in the intial and lower in the
performance years
I
later E etc
years g Machinery Equipment
3 Revaluation Method
This method depreciates assets to their
according
valuation at the end
of the year The depreciation
isn't consistent but varies depending on the
in assets It
applies to assets which are
change
low value individually but when aggregated the
in
amount becomes material E chairs in a school
g
in a vestuavant loose tools in a factory
cutlery
Calculation of each method and relevant terms
is
Depreciation charged annually every year
cost of the Asset
asset including
The purchase
price of the any
capital expenditure
Life of the Asset
The expected duration the asset will be used
by
The business
Scrap value
The remaining value of the asset once its
residual value life has been consumed
Accumlated Depreciation
The total depreciation which has been charged
on the asset to date
1 line method
Straight
same depreciation charged every year to reflect
the pattern
of utility consumption
Method 1 Depreciable
amount
cost
Annual Depreciation
scrap value
life
Example 1
cost 4
20,000 Life years Scrap
2000
Annual Depreciation 20000 2000
4
4500
Depreciation Table
Cost 20,000
Year 1 4500
Depreciation
Net Book Value Year I 15,500
Year 2 4500
Depreciation
Net Book Value Year 2 11,000
Year 3 Depreciation 4500
Net Book Value Year 3 6500
2
Example
cost 301000
scrap 4000 Dep rate 25
100 25 4
years life
Annual 30,000 4000 25
Depreciation
OR
30,000 4000
4
6500 annum
Method 2
Annual Depreciation cost
Dep rate
It is
useful when there is no scrap
value
1
Example
Cost 15000 20
Deprate
Annual Depreciation 15000 20
OR
15000 0
3000 annum
Reducing Balance Method
2
in the intial and lower
Higher depreciation years
depreciation in the later
years
Method
Annual Depreciation
Dep rate NBV
of Asset before Depreciation
1
Example
cost 20,000 40 Red Bal 3
Dep Life year
table
Depreciation
Cost 20,000
Year 1
Dep 20,000 40 8000
Year 1 Net Book Value 12000
Year 2 12000 40 4800
Dep
Year 2 Net Book Value 7 200
Year 3 72004 40 2880
Dep
Year 3 Net Book value 4320
2
Example
Cost Red Bal 3
301000 Dep 501
Life yrs
table
Depreciation
Cost 30000
Year 1
Dep 30,000 501 15000
Year 1 Net Book Value 15000
Year 2 15000 50 7500
Dep
Year 2 Net Book value 7500
Year 3
Dep 7500 501 3750
Year 3 Net Book value 3 7 50
Bal method to NBV
Reducing formula find directly
NBV Cost I r
n no
of years
r rate decimals
of dep in
Example 3
Cost 50 Red Bal 2
301000 Dep Life years
NBV2 30000 1 0.5 7500
Example 4
Asset purchased on 1 Jan 2010
at 20 Balance
Dep Reducing
NBV at 31 Dec 2011 32000
2
32000 n 1 0 2
N 50 000
How to calculate the
dep for year directly
5
Example
cost 50,000 Dep 20 Red Bal Life 2 years
step 1 calculate dep
for the first year normally
Multiply the dep amount with
2
step remaining
Cost 50,000
Year 1 50,000 20 10,000
Dep
Net Book Value Year I 40,000
Year 2 10,000 80 8000
Dep
Net Book value Year 2 32000
Year 3 Dep 8000 801 6400
Net Book value Year 3 25600
Year 4 6400 80 5120
Dep
Net Book value Year 4 20,480
Year 5 Dep 5120 80 4096
Net Book value Year 5 16,384
3 Revaluation Method
but
It is applied to assets which are low in value
and
high in quantity There is no
proper policy
the depreciation is based on revaluations
opening valuation Purchase Disposal Dep
va
Closing
valuation Purchase Clos Val
opening Disposal Dep
1
Example
Balance 1 Jan 10,000 Purchase 5000
Disposal 1000 Bal 31 Dec 12000
Annual Depreciation
10,000 5000 1000 12000 2000
The valuations are the question and
provided in
obtained the business
by by using certified valuers
How is Depreciation applied in books of Accounts
Depreciation is charged in the accounts so that a
cost be included the the NCA in the
can
for use
of
operations of the business
asset its
To spread the cost
of the over
life
Requirements skills
a Calender b
Policy c Gain loss calc
d CDA
f J E
Ledger AIC
e
Depgrid
a Calendar
The is to calculate how much
purpose of the calendar
the asset was used in different financial year This
is
important because it is not that the
necessary
FY end of a business is same as the calendar
year
31 Dec When the has a
financial year different
end the NCA has to be calculated
for each
usage of
FY be
separately so that the depreciation policy can
applied correctly
calendar
starting date Ending date
Duration of use
It important to note down the
is no
of months
used in each financial
year
Example 1
Date Purchase Date
of 1
July
2010
of Disposal
30 June 2013 financial year ends on 30
Apr
Solution
1 30
May April
2009 2010
2010 JASON DJFMA 2011 10 months
20 11 2012 1
year
2012 2013 1
year
2013 MJ 2014 2 months
2
Example
Date
of Purchase I March 2015 Date
of Disposal
31 Dec 2017 financial ends on 31 oct
year
Solution
1 Nov 31 Oct
2014 MAMJJA SO 2015 8 months
2015 2016 1
year
2016 2017 1
year
2017 N D 2018 2 months
b
Policy
Policy is the interpretation of the usage of the NCA
in each financial year
some business want to calculate the exact
on the deprecia
of
use asset ion charge dep
an and hence
according to the exact dates of usage Monthly
Where businesses that to calculate
as some
feel timing
the exact dep waste time and efforts
for some insig
nificant details and are therefore ok with just an
estimated value Annual Estimated
of depreciation
Monthly In this
policy
we
charge dep for exact
and the examiner can use the clauses
usage following
is to be
Dep charged monthly
to be
Dep is
charged for each month of ownership
Dep is
purchase to date of
charged from date of
disposal
Dep is charged for each proportion of the year
Annual In this method we don't
focus on the mon
hs instead we
charged a full year's depreciation in
the and no depreciation in the
year of purchase
Possible clauses be
year of disposal
can
is to
Dep charged annually
Dep is charged for full year in the year
a
of purchase but none in the year of disposal
Dep is charged on all assets held by business
at the end
of year
Example 1 Annual
Date of purchase 1 feb 2009 at 20000 Date of
disposal 30 Nov 2012 financial ends on 30 Jun
year
10 line
Depreciation straight
1 30 June
July Annually Dep
2008 FM AMT 2009 5 months 1 2000
yr
2009 2010 1 1 2000
year yr
2010 2011 1 1 2000
year yr
2011 2012 1 1 2000
year yr
2012 TASON 2013 5 months
2
Example Monthly
Date Purchase 1 Jan 2010 at 30,000 Date
of of
financial 31 Mar
year ends
Disposal 30 sept 2012 on
Depreciation 20
Straight line
1 31
Apr Mar Monthly Dep
3 661
2009 JTM 2010 3m 3m 12 1500
2010 2011 12m 6000
If
2011 2012 12M 6000
Iy
6
2012 AMJJAS 2013 6m 6m 12 6k 3000
C Gain or Loss on
Disposal
when an asset is disposed it has a certain NBV
based on the calendar depreciation method and policy
on the value at which the asset was
Depending
sold we can calculate the or Loss
gain on
disposa
the asset is sold than its NBV then
If for more
the Difference is called on
gain disposal
the asset is sold for the less than its NBV Than
If
The difference is called loss on
disposal
Example 1
Date Purchase 1 2009 at Date of
of Apr 20,000
31 Dec 2012 at 5000 financial ends
Disposal year
at 30 June
a 20 SL SL 20000 201 4000
Annually
b 20 SL
Monthly
c 20 R B
Annually
d 20 R.B
Monthly
1 30 June
July Annually Monthly
2008 AMJ 2009 3m 1 3m
yr
2009 2010 12m
Iyr 1yr
2010 2011 1 1 12m
yr yr
2011 2012 1 1 12m
yr yr
2012 JASOND 2013 6M X 6M
3 6
a 4000 4 16000 b 12 44 12K 12 44
Cost 20000 Cost 20000
Acc 16000 Acc 15000
Dep Dep
NBV 4000 NBV 5000
5000 5000
Disposal Disposal
Gain 1000 Gain Loss
C 20000 201 4000 d 20000 201 3
12 1000
40002 80 3200 19000 201 3800
32007 807 2560 152004 20 3040
2560 80 2048 12160 201 2432
9728 201 6 973
NBV 8192 12
Disposal 5000 NBV 8775
Loss 3192 5000
Disposal
LOSS 3775
calculation Dep charged for the
of year for
multiple assets in use
d
Depreciation Grid
when we have details of each individual item
purchases in the class of the asset
e CDA
when the questions only provides the total valuation
of the assets in a class
C continued use
Disposal
A Acquisition Purchases
working model
opening balance
C D A
value xx XX xx
Rate x x x
Policy
XX XX XX
Dep
the
Dep for year
This calculation can be done either on cost dep
amount or on NBV
depending on the dep given
in the question
Example
financial ends on 31 Dec 2015 at 1 Jan 2015
year
Motor vehicle cost Prov 32000
85000 for Dep
During the year
Acquired machine worth 25000 on 1
July 2015
sold an old motor vehicle at 5000 cost 20,000
and accumulated depreciation of 14000
for
straight line method use cost values
For Reducing balance method use N B V values
a 20 line
straight annually
85000
C D A
65000 20000 25000
201 201 201
I X 1
13000 X 5000
18000
Dep for year
b 20 line
straight monthly
85000
C D A
65000 20000 25000
20 20 201
9 12 0
1 12
13000 3000 2500
for the 18,500
Dep year
c 20 Reducing balance annually
85000 320007
C D A
47000 6000 25000
201 201 20
1 X 1
9400 X 5000
Dep for year 14,400
d 20
Reducing balance monthly
85000 320007
C D A
47000 6000 25000
201 201 20
1 9112 6 12
9400 900 2500
Dep for year 12,800
How to calculate the rate
of depreciation
only in annual policy
1
Straight line Dep for year 100 2
cost of NCA at yearend
2 balance Dep for 100 2
Reducing year
NBV at
year end before
dep for the year
How asset value the
changes during year
1 Cost value
only the costs of all assets held
by
the
business
opening Bal Purchase during Disposal Closing
Bal
at cost at cost at cost at cost
year
2 Accumlated Depreciation
bat Acc Dep ba
opening of Dep charge of closing
Acc for year Asset disposal at NBV
dep
3 Net Book Value
opening Bal Purchase Disposal bat
Depfor closing
at NBV at costs NBV the at NBV
of year
Example
At 1 Jan 2010
M.V at cost 80,000 Acc Dep 24000 NBV 56000
the 31 Dec 2010
During year
Purchased a Motor vehicle costing 25000
M.V NBV 8000
costing 20,000
a
Disposed
is charged on 20 R.B Annual
Depreciation
1
Dep charged for the year
56000
48000 8000 25000
20 20 201
I 1
9600 5000 14600
2 Cost
closing
80000 25000 20000 85000
3 Accumlated Dep
24000 14600 12000 26600
4 Net Book value
56000 25000 8000 14600 58400
Trade in allowance