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Depreciation

O/A level Accounting & Business

DANIYAL SIDDIQUI
Accounting for depreciation and disposal of non-current assets

 Define depreciation
 Explain the reasons for accounting for depreciation
 Name and describe the straight-line, reducing balance and revaluation methods
of depreciation
 Prepare ledger accounts and journal entries for the provision of depreciation
 Prepare ledger accounts and journal entries to record the sale of non-current
assets, including the use of disposal accounts.

Definition:

The process of reducing the book value of non-current assets.

Provision for depreciation or Accumulated depreciation:

Total depreciation of a non-curreent asset to-date

Contra asset
Credit account

Book value:

Original cost of a non-current asset less its accumulated depreciation

Non-current assets are valued at net book value according to the Prudence concept

Cause of depreciation:

1. Wear and tear

2. Obsolescence

3. Passage of time
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4. Legal limit

O/A level Accounting & Business

DANIYAL SIDDIQUI
5. Depletion

Depreciation policy

Calculation of depreciation in
Depreciation policy
Year of Purchase Year of Sale

Full year depreciation in

the year of purchase and 12 months No depreciation
none in the year of sale

Full year depreciation in

the year of purchase and 12 months 12 months
year of sale

No depreciation in the From start of accounting

year of purchase No depreciation period to date of sale

Depreciation is charged From date of purchase to From start of accounting

from date of transaction end of accounting period period to date of sale

Question did not specify From date of purchase to From start of accounting
any of the above end of accounting period period to date of sale

Straight-line method of depreciation

Formula:

( Cost - Scrap value) OR Cost × Rate of depreciation (%)

Life of the year
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Effect on Profit for the year:

O/A level Accounting & Business

DANIYAL SIDDIQUI
Depreciation expenses remains constant over the asset's useful life
Effect on profit for the year is constant

Reducing-balance method of depreciation

Formula:

( Cost - Accumulated depreciation ) × Rate of depreciation (%)

Effect on Profit for the year:

Depreciation expenses decreases over the asset's useful life

Profit for the year increases as depreciation expenses decreases

Revaluation method of depreciation

Formula:

Value of asset + Purchases - Disposal - Value of asset

at start of during the year during the year at end of
accounting year accounting year

Disposal of fixed assets

When a fixed asset reaches the end of its useful life or when it is no longer needed by the
business, it will be sold. It is important that sales of fixed assets are not treated in the
same way as sales of stock in trade. When fixed assets are purchased this is known as
capital expenditure and the asset is recorded in a fixed asset account rather than the
purchases account. When fixed assets are sold this is known as a capital receipt and the
transaction is recorded in a special account, a disposal of fixed asset account, rather than
the sales account.

When a fixed asset is sold it must be eliminated from the books of account. The cost of
the asset and the depreciation to date on the asset are transferred from the appropriate
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accounts to the disposal account. The amount received for the fixed asset is also entered

O/A level Accounting & Business

in the account. Any difference on the account is the profit or loss on sale - in other Words

DANIYAL SIDDIQUI
the under or over-provision of depreciation. It is only when the asset is sold that the actual
amount of depreciation is known; until this time the depreciation is only an estimate. The
disposal account will be closed by transferring the difference on the account (the profit
or loss on sale) to the Profit and Loss Account.

Similar entries are required when a fixed asset is disposed of but not actually sold. It may
be that an asset is handed to a supplier in part- exchange for another fixed asset: it may
be that the asset is scrapped and has no value whatsoever.

Journal Entries

1. Double Entry for Depreciation

Income Statement (Dr)
Provision for Depreciation (Cr)

Ledgers relating to Depreciation

1. Assets Accounts

Date Details $ Date Details $

Opening Disposal
balance
Bank Balance
c/d
Balance
b/d

2. Provision for accumulated depreciation machine / equipment / furniture

/ premises

Date Details $ Date Details $

Disposal Opening
balance
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Balance Income
c/d statement

O/A level Accounting & Business

DANIYAL SIDDIQUI
Balance
b/d

1. Disposal Entries

Following are the entries of Disposal

 Disposal Account (Dr)
 Machine/Vehicle/Equipment (Cr)
 Provision for depreciation (dr)
 Disposal Account (cr)
 Cash (dr)
 Disposal Account (dr)
 Loss on sale (Dr)
 Disposal Acconut (cr)
 Disposal Account (dr)
 Gain on sale (cr)

Disposal Account

Date Details $ Date Details $

Machine/Vehicle/Buildings Provision of
Dep/Accumulated
dep
Gain on sale Bank/Cash
Loss on sale

1. Sariah owns a business selling ladies’ clothing. She maintains a system of double
entry bookkeeping.

The following occurred during September 2020.

1. Purchased a motor vehicle on credit from Sharpe Motors $6350.

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2. Ruhee, a credit customer, was declared bankrupt owing Sariah $1200. The debt is
to be written off.

O/A level Accounting & Business

DANIYAL SIDDIQUI
REQUIRED

Prepare journal entries to record the above transactions. Narratives are not required.
Sariah is preparing her financial statements for the year ended 30 September 2020. She
provides the following information for fixtures and fittings.

2019 $
Fixtures and fittings at cost
October 1 28 600
Provision for depreciation of fixtures and fittings 6 185
2020
Sold fixtures and received a cheque
January 31 1 150
The fixtures had been purchased on 1 February 2018 for $1500
March 31 Purchased new fixtures paying by cheque 3 500

Sariah’s policy is to provide depreciation on fixtures and fittings at 10% per annum using
the reducing balance method. A full year’s depreciation is charged in the year of purchase
but none in the year of disposal.

REQUIRED

(a) Prepare the following accounts for the year ended 30 September 2020. Close the
accounts by balancing or by making an appropriate year end transfer.
Sariah is considering forming a partnership with her friend Emy who runs a similar
business.

REQUIRED

(a) Advise Sariah whether or not she should form a partnership with Emy. Justify your
answer with two advantages and two disadvantages of forming a partnership with Emy.

QUESTION 1 NOVEMBER 2009 P2 Q2 (a to e)

Universal Industries provided the following information:

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1. Purchased a machine for $8 000 on 1 October 2007.

O/A level Accounting & Business

DANIYAL SIDDIQUI
2. Sold the machine for cash, $7 000, on 31 March 2009.

3. The policy of Universal Industries is to charge depreciation at the rate of

10% per annum on cost using the straight line method. Depreciation on
machinery is charged from the date of purchase and up to the date of sale.

4. All sales of non-current assets are recorded in a disposal account.

5. Universal Industries prepares financial statements on 31 March each year.

REQUIRED

(a) Explain the term depreciation. *2+

(b) State two reasons why non-current assets depreciate. *2+

(c) Prepare the journal entries to record the sale of the machine. Show the
transfer of any profit or loss on the sale to the financial statements on 31
March 2009. Narratives are not required. *8+

(d) Explain why depreciation is an application of the accruals concept. *2+

(e) Complete the table below for items (i) to (iii). State in each case the most
appropriate method of depreciation and give one reason for your answer.

Asset
(i) Buildings Method of depreciation
Reason
(ii) Computers Method of depreciation
Reason
(iii) Loose tools Method of depreciation
Reason *6+
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DANIYAL SIDDIQUI
O/A level Accounting & Business
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O/A level Accounting & Business

QUESTION 2 MAY 2010 P21 Q2 (a to e)

DANIYAL SIDDIQUI
Sparky Ltd set up business on 1 May 2008 with the following assets:

$
Property (Land and buildings) 150

000
Computer equipment 40 000
Inventory (stock in trade) 70 000

Sparky Ltd decided on the following policy for depreciation:

1. Land costing $80 000 was not to be depreciated.

2. Buildings are to be depreciated at 2% per annum on cost using the straight

line method.

3. Computer equipment is to be depreciated at 25% per annum using the

diminishing (reducing) balance method.

REQUIRED

(a) State two causes of depreciation. *2+

(b) Explain why Sparky Ltd does not depreciate each of the following:
 Land
 Inventory *4+
(c) Explain why depreciation is an application of the matching/accruals principle.
*2+
(d) Calculate the depreciation on property (land and buildings) for the year
ended 30 April 2009. *1+ On 30 April 2010 Sparky Ltd sold some of the
computer equipment for $7 000. The computer equipment had cost $12 000
on 1 May 2008. Sparky Ltd charges a full year’s depreciation in the year of
disposal.

REQUIRED
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(e) Prepare disposal account on 30 April 2010 recording the disposal of the
computer equipment. *5+

O/A level Accounting & Business

DANIYAL SIDDIQUI
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QUESTION 3 MAY 2011 P22 Q2 (a to e)

Amayi owns a manufacturing business. Her financial year ends on 30 April. She has the

O/A level Accounting & Business

DANIYAL SIDDIQUI
following depreciation policy:

Machinery is depreciated at the rate of 25% per annum using the diminishing (reducing)
balance method. Office furniture is depreciated at the rate of 10% per annum using the
straight-lin method. Loose tools are depreciated using the revaluation method. A full
year’s depreciation is charged on assets in the year of purchase but no depreciation is
charged in the year of sale.

REQUIRED

1. Give two reasons why depreciation should be charged. *4+

2. Suggest one reason why the diminishing (reducing) balance method might
be the most appropriate method for Amayi to depreciate her machinery.
*2+

The following information is available for the year ended 30 April 2011.

1. Balances 1 May 2010

Non-current assets at cost $
Machinery 80 000
Office furniture 15 000
Provisions for depreciation
Machinery 60 000
Office furniture 5 000

2. On 31 July 2010, additional machinery, $18 000, was purchased.

3. On 20 February 2011, office furniture, which had cost $1 000 on 1 May 2008,
was sold for $550 cash.
4. On 1 May 2010, loose tools, cost price $1600, were valued at $1050.
Additional loose tools were purchased during the year for $630.

On 30 April 2011 loose tools were valued at $1400.

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REQUIRED

O/A level Accounting & Business

DANIYAL SIDDIQUI
(a) Calculate the depreciation to be charged on each of the following for the year
ended 30 April 2011.

(i) Machinery

(ii) Office furniture

(iii) Loose tools *6+

(b) Calculate the profit or loss on the office furniture sold on 20 February 2011. *3+

(c) Calculate the net book value on 30 April 2011 of

(i) Machinery

(ii) Office furniture *2+

__________________________________________________________________________
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O/A level Accounting & Business

DANIYAL SIDDIQUI
QUESTION 4 NOVEMBER 2012 P21 Q2

On 31 August 2011 the following extract was taken from the balance sheet of Stavros

Cost Accumulated NBV

Non-current assets depreciation
$ $ $
Equipment 60 000 24 000 36 000
Office Computers 8 000 5 600 2 400
68 000 29 600 38 400

The following transactions took place during the year ended 31 August 2012:

(1) On 31 January 2012, equipment purchased on 1 April 2009, at a cost of $28

000, was sold for $10000. Payment was received by cheque.
(2) On 1 February 2012, new equipment was purchased at a cost of $35 000.
(3) On 20 March 2012, office computers were purchased for $600.
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Stavros has the following depreciation policy:

O/A level Accounting & Business

DANIYAL SIDDIQUI
Equipment is depreciated at the rate of 20% per annum using the straight-line method.
Office computers are depreciated at the rate of 25% per annum using the diminishing
(reducing) balance method. A full year’s depreciation is charged on equipment and office
computers in the year of purchase. No depreciation is charged on equipment in the year
of sale.

REQUIRED

(a) Explain the term depreciation. *2+

(b) State two causes of depreciation. *2+

(b) State one advantage of using the straight-line method of depreciation *2+

(c) Prepare the following ledger accounts for the year ended 31 August 2012:

(i) Provision for depreciation of equipment account

(ii) Equipment disposal account *8+

(d) Complete the following balance sheet (extract) for the non-current assets on
31 August 2012.

Accumulated
Non-current assets Cost NBV
depreciation
$ $ $
Equipment
Office Computers
*6+
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DANIYAL SIDDIQUI
O/A level Accounting & Business
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QUESTION 5 MAY 2013 P21 Q4

On 1 April 2011 Lynne purchased two motor vehicles for business use on credit from Villa

O/A level Accounting & Business

DANIYAL SIDDIQUI
Motors Limited.

The vehicles cost $12 000 each.

Depreciation is charged on the motor vehicles at 20% per annum by the diminishing
(reducing) balance method. A full year’s depreciation is charged in the year of purchase
but no depreciation is charged in the year of sale. On 23 January 2013 one of the motor
vehicles was sold for $6 500.

REQUIRED
(a) Show the journal entry to record the purchase of the motor vehicles on 1
April 2011.

Dates and narratives are not required. *2+

(b) Prepare the provision for depreciation account for the years ended on 31
March 2012 & 2013. *5+

(c) Prepare the disposal account. *5+

(d) State two other methods of depreciation. *2+

QUESTION 6 NOVEMBER 2013 P22 Q1 (c & d)

(c) Give two other uses of the general journal. [2]

(d) Kulbir operates on a mark-up of 25%. The table below contains transactions carried
out by Kulbir in her first week of trading. Complete the table for each transaction. The
first transaction has been completed as an example.

Book of
Source Effect on
2013 Transaction prime
document Profit
entry
Goods sold, cost price $400, on Increase
Jan 4 Invoice Sales journal
credit to Keen $100
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Keen returned goods, selling price

Jan 5
$80

O/A level Accounting & Business

DANIYAL SIDDIQUI
Payment made to J Singh, $323 in
Jan 6 cash, after deducting $17 cash
discount
Kulbir withdrew $200 from the
Jan 7
bank for personal use
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QUESTION 7 NOVEMBER 2014 P21 Q2 (a to e)

The following information relates to the delivery vehicles of Swift Limited. [9]

O/A level Accounting & Business

DANIYAL SIDDIQUI
1 July 2012 Purchased delivery vehicle 1 for $15 000.
1 July 2013 Purchased delivery vehicle 2 for $20 000.
30 June 2014 Disposed of delivery vehicle 1 and received a cheque for $8 000.

Depreciation is charged at the rate of 20% using the diminishing (reducing) balance
method.

REQUIRED

(a) State two causes of depreciation of a delivery vehicle. [2]

(b) Complete the following table to show the depreciation charged for the years ended
30 June 2013 and 30 June 2014.

Year ended Delivery vehicle 1 Delivery vehicle 2 Total for year

$ $ $
30 June 2013
30 June 2014
Total
[3]
(c) Prepare the provision for depreciation of delivery vehicles account for the year
ended 30 June 2014. Balance the account and bring down the balance. [4]
(d) Prepare the journal entries to record the disposal of delivery vehicle 1. Narratives
are not required. [6]
(e) Prepare an extract from the statement of financial position at 30 June 2014,
showing the delivery vehicles. [2]
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DANIYAL SIDDIQUI
O/A level Accounting & Business
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O/A level Accounting & Business

QUESTION 8 NOVEMBER 2014 P22 Q2 (a to d)

DANIYAL SIDDIQUI
Ajib commenced business on 1 October 2014 delivering parcels to customers’ homes. He
purchased a motor van on that date, the details are as follows.

$9 600
Purchase price Life of motor van
3 years
Residual value
$1 200

Ajib is undecided whether to use the straight-line method or diminishing (reducing)

balance method to depreciate the motor van. If Ajib uses the diminishing (reducing)
balance method the annual rate of depreciation charged would be 50%.

REQUIRED
(a) Explain the term depreciation. *2+
(b) Complete the following table to show the depreciation to be charged for the years
ended 30 September 2015, 2016 and 2017 using the straight-line method and the
diminishing (reducing) balance method. *6+
(c) State one advantage of Ajib using the straight-line method when depreciating the
motor van. *1+
(d) State one advantage of Ajib using the diminishing (reducing) balance method when
depreciating the motor van. *1+
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O/A level Accounting & Business

DANIYAL SIDDIQUI
QUESTION 9 MAY 2015 P22 Q2

Atto Electrical had the following non-current assets on 31 March 2013.

Net book value ($)

Premises (cost $50 000) 48 000
Motor vehicles (cost $16 000) 12 000
Computers 6 000
Atto Electrical has the following depreciation policy.
Premises are depreciated at the rate of 2% per annum by straight-line method.
Motor vehicles are depreciated at the rate of 25% per annum by diminishing (reducing)
balance method.
Computers are depreciated by revaluation method.
A full year’s depreciation is charged on all non-current assets owned at the end of the
financial year.
1. There were no purchases or sales of non-current assets during the year ended 31
March 2014.
2. The following purchases of non-current assets were made during the year ended
31 March 2015. Payments were made by cheque.
$
Premises 30000
Motor vehicles 9000
Computers 3200
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O/A level Accounting & Business

DANIYAL SIDDIQUI
3. Computers were valued as follows:
$
31 March 2014 4200
31 March 2015 6000

REQUIRED

(a) Explain the term depreciation.

[2]

(b) State one cause of depreciation of a computer. [1]

(c) Complete the table to show the depreciation to be charged to the income
statement for each of the years ended 31 March 2014 and 31 March 2015.

Year ended 31 March Year ended 31 March

2014 ($) 2015 ($)
Premises
Motor
vehicles
Computers
[6]
(a) Prepare the following ledger accounts for each of the years ended 31 March 2014
and 31 March 2015. Balance the accounts and bring down the balances on 1 April.

(i) Motor vehicles account [4]

(ii) Motor vehicles provision for depreciation account [5]

(b) Identify which two of the following accounting principles/concepts support the
charging of depreciation in an accounting year.

(i) Accruals/Matching

(ii) Dual aspect

(iii) Going concern Materiality

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DANIYAL SIDDIQUI
O/A level Accounting & Business
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O/A level Accounting & Business

DANIYAL SIDDIQUI
QUESTION 10 MAY 2016 P21 & 22 Q2 (a to d)

Money measurement [2]

The following balances were recorded in the books of Sofea on 1 March 2015.

$
Motor vehicles account (at cost) 50 000
Motor vehicles - Provision for depreciation account 18 400

1. On 31 May 2015 a motor vehicle costing $16 000 and with an accumulated
depreciation of $7000 was sold for $8 400.
2. On 30 June 2015 a motor vehicle costing $20 000 was purchased on credit.
3. The depreciation policy of Sofea is as follows:

Motor vehicles are depreciated at the rate of 25% per annum using the diminishing
(reducing) balance method. A full year’s depreciation is charged in the year
of purchase. No depreciation is charged in the year of sale.

REQUIRED

(a) State the meaning of the accounting term depreciation. *2+

(b) Identify by ticking the appropriate box (✓) whether each statement about
depreciation is true or false. The first one has been completed as an example.

Statement Statement False

There is only one method of charging depreciation. ✓
Depreciation is the cash set aside for non-current asset
replacement.
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Depreciation is an application of the going concern

concept.
*2+
(a) Calculate the:

O/A level Accounting & Business

(i) Profit or loss on the sale of the motor vehicle on 31 May 2015. *1+

DANIYAL SIDDIQUI
(ii) Motor vehicles depreciation charge for the year ended 29 February 2016.
*2+

(b) Prepare the motor vehicles provision for depreciation account for the year ended
29 February 2016. Balance the account and bring down the balance on 1 March 2016.
*5+
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DANIYAL SIDDIQUI
O/A level Accounting & Business