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# Depreciation of Fixed Assets III

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:

1. Asset account ( e.g. Machinery Account)
2. Provision for Depreciation Account
3. Profit and Loss Account
4. 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
1. What are books of prime entry?
2. List any seven books of prime entry
3. State six reasons for keeping accounting records
4. Explain six factors that are taken into consideration in determining annual depreciation charge
5. 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.

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