Back to: FINANCIAL ACCOUNTING SS2
Welcome to class!
In today’s class, we will be talking more about the depreciation of fixed assets. Enjoy the class!
Depreciation of Fixed Assets III
ACCOUNTING TREATMENT OF DEPRECIATION
There are two ways of treating depreciation in the ledgers. These are the Old Method and the Modern Method. However, the Modern Method which is preferred by accountants will be considered.
MODERN METHOD
An asset account is opened and a separate provision for depreciation account is also opened. The depreciation for each year is debited to the Profit and Loss Account and credited to the Provision for Depreciation Account
Therefore the following accounts should be prepared:
- Asset account ( e.g. Machinery Account)
- Provision for Depreciation Account
- Profit and Loss Account
- Balance Sheet
Illustration
A machine cost N100,000. It is expected to have a useful life of five years at the end of which time it is expected to be sold for N20,000 (its residual value).
You are required to show the necessary ledger accounts assuming the machine is depreciated on the straight-line basis.
Solution
Annual Depreciation Charge = Cost – Scrap Value
Estimated useful life
= 100,000 – 20,000
5
= 80,000
5
= N16,000
Ledger Accounts:
Machinery
N
Year 1 Cash 100,000 Year 1 Balance c/d 100,000
Year 2 Balance b/d 100,000 Year 2 Balance c/d 100,000
Year 3 Balance b/d 100,000 Year 3 Balance c/d 100,000
Year 4 Balance b/d 100,000 Year 4 Balance c/d 100,000
Year 5 Balance b/d 100,000 Year 5 Balance c/d 100,000
Profit Loss Account (extracts)
N
Year 1 Provision for dep. of machinery 16,000
Year 2 Provision for dep. of machinery 16,000
Year 3 Provision for dep. of machinery 16,000
Year 4 Provision for dep. of machinery 16,000
Year 5 Provision for dep. of machinery 16,000
Provision for Depreciation of Machinery
N N
Year 1 Balance c/d 16,000 Year 1 Profit and Loss A/c 16,000
Year 2 Balance c/d 32,000 Year 2 Balance b/d 16,000
Profit and Loss A/c 16,000
32,000 32,000
Year 3 Balance c/d 48,000 Year 3 Balance b/d 32,000
Profit and Loss A/c 16,000
48,000 48,000
Year 4 Balance c/d 64,000 Year 4 Balance b/d 48,000
Profit and Loss A/c 16,000
64,000 64,000
Year 5 Balance c/d 80,000 Year 5 Balance b/d 64,000
Profit and Loss A/c 16,000
80,000 80,000
Notes:
* The fixed asset account continues to show the machine at a cost each year of its life. Fixed assets accounts sometimes include the words ‘at cost’ in their titles to emphasize this point.
* The balance on the Provision for Depreciation of Machinery Account increases each year.
* A provision in accounting is an amount set aside for a particular purpose.
* A separate Provision for Depreciation account must be opened for each class of fixed assets.
* The balance on the Provision for Depreciation account is deducted from the cost of the fixed asset in the Balance Sheet.
* The balance remaining after depreciation has been deducted from cost is known as NET BOOK VALUE (NBV) or WRITTEN DOWN VALUE(WDV) of the asset. It is the amount of the cost of the asset which has not yet been charged against profit in the Profit and Loss Account.
Balance Sheet (extract)
FIXED ASSETS Cost Dep. NBV
Year 1 Machinery 100,000 16,000 84,000
Year 2 Machinery 100,000 32,000 68,000
Year 3 Machinery 100,000 48,000 52,000
Year 4 Machinery 100,000 64,000 36,000
Year 5 Machinery 100,000 80,000 20,000
GENERAL EVALUATION
- What are books of prime entry?
- List any seven books of prime entry
- State six reasons for keeping accounting records
- Explain six factors that are taken into consideration in determining annual depreciation charge
- State six errors that would not affect the agreement of the trial balance.
In our next class, we will be talking about Final Accounts – Working Exercises. We hope you enjoyed the class.
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
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