Financial accounting mgt101 power point slides lecture 18
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Transcript of Financial accounting mgt101 power point slides lecture 18
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Financial Accounting
1
Lecture – 18
Depreciation
“It is a systematic allocation of the cost of a depreciable asset to expense over its useful life”.
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Financial Accounting
2
Lecture – 18
Classification of Fixed Asset Land Building Plant and machinery Furniture Equipment Vehicles
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Financial Accounting
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Lecture – 18
• No depreciation is charged on Land.
• Amount paid for Leased Land is charged over the lease term.
• It is called amortization.
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Financial Accounting
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Lecture – 18
Policies for Recording Fixed Asset
• Minimum value of item which will be recorded as asset.
• Depreciation method to be used.
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Financial Accounting
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Lecture – 18
Methods of Depreciation
• Straight Line Method
• Written Down Value Method (WDV)
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Financial Accounting
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Lecture – 18
• Cost of Asset – Price at which the asset was initially recorded.
• Written Down Value / Book Value – Cost minus Accumulated Depreciation.
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Financial Accounting
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Lecture – 18
Journal Entries
• Purchase of asset
Debit Asset Account (relevant classification)
Credit Cash / Bank / Payable Account
• Charging of Depreciation
Debit Depreciation Account (P & L)
Credit Accumulated Dep.
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Financial Accounting
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Lecture – 18
Written Down Value Method
Calculation of Rate
• Rate = 1 – n RV / C
• “RV” = Residual Value
• “C” = Cost
• “n” = Life of Asset
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Financial Accounting
9
Lecture – 18
• Residual Value – is the price at which the asset is expected to be sold at the end of its useful life.
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Financial Accounting
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Lecture – 18
Calculation of Rate
• Cost = 100,000
• Residual Value (RV) = 20,000
• Life = 3 years
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Financial Accounting
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Lecture – 18
• Rate = 1 – 3 20000/100000
= 42%
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Financial Accounting
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Lecture – 18
Year 1
Cost 100,000
Depreciation100,000 x 42% (42,000)
WDV (Closing Balance) 58,000
Year 2
WDV (Opening Balance) 58,000
Depreciation 58,000 x 42% (24,360)
WDV (Closing Balance) 33,640
Year 3
WDV (Opening Balance) 33,640
Depreciation 33,640 x 42% (14,128)
WDV (Closing Balance) 19,511
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Financial Accounting
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Lecture – 18
Disposal of Asset
Cost of Asset = 100,000
Life Of the Asset = 5 Years
Depreciation Method = Straight Line
Residual Value = Rs. 10,000
Sale Price After Five Years= Rs. 15,000
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Financial Accounting
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Lecture – 18
Did we lose Rs. 85,000 (100,000 – 15,000) on the disposal of this asset?
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Financial Accounting
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Lecture – 18
Method of Depreciation = Straight line
Total Depreciation in Five Years = 18,000 x 5
= 90,000
Book Value After Five Years = 100,000 - 90,000
= 10,000
Profit on Disposal = 15,000 – 10,000
= 5,000
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Financial Accounting
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Lecture – 18
Recording of Disposal
Recording of Disposal
Debit Fixed Asset Disposal A/c 100,000
Credit Fixed Asset Cost A/c 100,000
(with the cost of asset)
Debit Accumulated Dep. A/c 90,000
Credit Fixed Asset Disposal A/c 90,000
(with the depreciation accumulated to date)
Debit Cash / Bank / Receivable A/c 15,000
Credit Fixed Asset Disposal A/c 15,000
(with the price at which asset is sold)
[note: one group to appear at a time]
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Financial Accounting
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Lecture – 18
Disposal of Asset Account
Fixed Asset Disposal Account
DEBIT CREDIT
Cost Account 100,000 Acc. Dep. Account 90,000
Cash / Bank 15,000
100,000 105,000
P & L Account 5,000
105,000 105,000Total Total
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Financial Accounting
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Lecture – 18
• Policy for Charging Depreciation
(1) depreciation can be charged on the basis of use,
OR
(2) full year’s depreciation is charged in the year of purchase and no depreciation is charged in the year of sale.
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Financial Accounting
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Lecture – 18
Example
• An asset is purchased for Rs. 500,000 on Nov. 01, 2001.
• Depreciation rate is 10% p.a.
• The Asset is sold on Apr. 30, 2004.
• Financial Year is July 1 to June 30
Question
• Calculate the WDV For both policies
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Financial Accounting
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Lecture – 18
Depreciation is Charged on the Basis of USe
Year On the Basis of Use Rs.
1-11-2001 Cost 500,000
2001-2002 Dep. 500,000 x 10% x 8 / 12 (33,333)
30-6-2002 WDV 466,667
2002-2003 Dep. 466,666 x 10% (46,667)
30-6-2003 WDV 420,000
2003-2004 Dep. 420,000 x 10% x 10 / 12 (35,000)
30-4-2004 WDV 385,000
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Financial Accounting
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Lecture – 18
Full Dep. In the Year of Purchase
Year Full Dep. in year of Purchase Rs.
1-11-2001 Cost 500,000
2001-2002 Dep. 500,000 x 10% (50,000)
30-6-2002 WDV 450,000
2002-2003 Dep. 450,000 x 10% (45,000)
30-6-2003 WDV 405,000
2003-2004 Dep. 00 in the year of sale 00
30-6-2004 WDV 405,000
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Financial Accounting
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Lecture – 18
Contents of Fixed Assets Register
• Different record for each class of assets
• Date of purchase
• Detailed particulars of asset
• Location of asset
• Record of depreciation