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Level Two

Depreciation

QuestionAnswer
Fixed Assets Lose Value Not worth much as when new, kept until it breaks down and worth only scrap value.
Spreading the Cost Asset lasts many years. Wrong charging cost as Revenue Expenditure relating to one year's profit. Some Asset value used up 1st year. Working life 10 years, charge one-tenth Revenue Expense assuming Asset decreases 10% generating profit for that year.
Depreciation - Annual Charge against Profits £50,000 last 15 years, if charged against profits 1st year, reduce profit for that year. Profits for subsequent years would be overstated. Cost spread over 15 years, annual portion treated as Revenue Expense.
Fixed Instalment - Straight Line Method £5,000 / 10 years work life =£500 each year charge P & L a/c depreciation, Asset in Balance Sheet reduced by £500. Scrap £500 (£5,000-£500) / 10 = £450 = £4,550 1st year
Reducing Instalment (Balance) Method / No Scrap Value £5,000 - 10% (£500) £4,500, Yr2 (£450) £4,050. Yr3 (£405) £3,645. Take many years reduce balance to zero. Charges more in early years of Asset's life and less when it's running down.
Record Depreciation via Journal Journal: Dr Depreciation Exp, Cr Asset Depreciate Prov. Asset a/c show original cost. Accumulated Depreciation. Cr Balance deducted from Asset a/c balance on face Balance Sheet showing current value Net Book Value (NBV)
Machinery (Fixed Asset) Account Dr Buy Machine (Fixed Asset) A - Cr Sale of Fixed Assets Dr Balance b/d
Depreciation Expense Dr Depreciation Provision £700; Cr Profit & Loss £700
Machinery Depreciation Provision Dr Sale Fixed Asset £600, Balance c/d £500 Cr Balance b/d £700; Dep. Expense £400 = £1,100
Sale of Fixed Assets Dr Machinery A £6,000; Cr Mach. Dep. Prov. £600; Bank £5,200; P&L £200 = £6,000
Created by: tmeakins