1 | DEPRECIATION

CHAPTER: 8
ACCOUNTING FOR TANGIBLE AND INTANGIBLE ASSETS
Shablil Hussain Alhadi
BBA, Major in Accounting and Information System,
Shahjalal University of Science and Technology, Sylhet.
MOBILE +8801793109920
 A statement of Financial Position should show the real Position of the assets and the liabilities of a firm
on a Particular day. The information provided therein should be relevant and reliable.
 According to FASB Study Group, “different valuation bases are preferable for different assets and
liabilities."
 According to SFAC-5, “the asset, liability and change in equity must have a relevant attribute that can
be quantified in monetary units with sufficient reliability.”
 According to SFAC-6, Assets are the Probable economic benefits Obtained on controlled by a
particular entity as a result of Past transactions on events.
 Liabilities are the probable future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the Future as a result of past
transaction-on-events.
Depreciation Of assets
 Depreciation is a systematic and rational process of cost allocation rather than a means of valuation,
an application of matching principle, whereby the cost of fixed assets used up during a period is
matched with the revenues generated by their use.
 Purposes of providing depreciation:
 One key purpose is to help maintain the original monetary investment in an asset, ensuring that
when the asset reaches the end of its life, the accumulated depreciation funds can contribute to
purchasing a replacement. This preserves the financial integrity of the business.
 Another purpose is to maintain the operating capacity of an asset, meaning that businesses are aware
of an asset's effective lifespan and are financially prepared for its eventual replacement. For example,
if a company purchases a delivery truck for $60,000 with a 10-year useful life, it might depreciate it by
$6,000 annually. This depreciation expense ensures that, by the time the truck needs replacement, the
business has accounted for its decline and is financially ready to invest in a new one.
 Factors to be considered in charging depreciation:
The four main factors to consider when charging depreciation are:
1. Cost of the Asset: The initial purchase price or acquisition cost of the asset, including any
installation or transportation costs, which forms the base for calculating depreciation.
2. Useful Life: The estimated duration (in years or units produced) that the asset is expected to be
productive for the business. This helps determine the period over which depreciation is spread.
3. Residual (Salvage) Value: The estimated value of the asset at the end of its useful life, if any. This
value is deducted from the cost to determine the total amount to be depreciated.
4. Depreciation Method: The chosen approach to allocating the depreciation expense, such as straight-
line, declining balance, or units of production. The method affects the timing and amount of expense
recognized each period.
 Different methods of depreciation:
(i) Straight-line method (iv) Interest methods:
(ii) Usage methods: a) Annuity method
a) Service-hours method b) Sinking fund method
b) Productive output method (v) Other methods:
(iii) Decreasing charge method a) Appraisal or inventory method
a) Fixed percentage of declining balance b) Retirement method
(DB) method c) Replacement method
b) Double declining (DD) balance
method
c) Sum-of-the-years'-digits (SYD)
method
d) Arbitrary assignment method
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 SLM (Straight Line Method):

With straight line depreciation, an asset's cost is depreciated the same amount for each accounting period.
It is calculated by dividing the difference between an asset's cost and its expected salvage value by the
number of years it is expected to be used.
Important Formulas:
 Depreciable value = cost price – salvage value
 Annual depreciation expense = (cost price – salvage value)/ number of estimated useful life.
Or, Annual depreciation expense = (cost price – salvage value) × depreciation rate.
 Depreciation rate= 100%/ estimated useful life.
 Accumulated depreciation = Annual depreciation expense × total used time
 Closing Book value = Cost price – accumulated depreciation
 Profit/loss= sales price –Closing book value
In case of calculating depreciation,
1 month = 30 days and
1 year = 360 days= 12 months.
Depreciation Schedule:
Calculation
Accumulated
Year Depreciable Depreciation Annual Depreciation Depreciation
×
value Rate

 Declining Balance Method:

This method applies a higher depreciation expense in the earlier years of an asset's life and reduces it over
time. It is suitable for assets that are more productive and efficient in their early years but experience a
decrease in value or productivity as they age. Examples include computers, technology equipment, and
machinery.
Important Formulas:
Annual depreciation expense = Opening Book value × Depreciation rate.
Depreciation rate= (100%/ estimated useful life) × 2
Closing Book value = Opening Book value – Annual depreciation Profit/loss=
sales price – Closing Book value
In case of calculating depreciation,
1 month = 30 days and
1 year = 360 days= 12 months.
Depreciation Schedule:
Calculation
Annual Closing Book Value
Year Opening Book value × Depreciation
Rate Depreciation

Remember, Depreciation is charged after the day of installation of an asset.

 Sum of the years digits Method:
Depreciation Schedule
Depreciation Accumulated Book
Purchase Depreciable
Year Calculation Expense Depreciation Value
value Value
(Tk.) (Tk.) (Tk.)

Sum of the Years' Digits Calculation:

Assume that Useful Life: 5 years
Sum of the Years' Digits: 1 + 2 + 3 + 4 + 5 = 15

𝑁𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑡𝑜 𝑢𝑠𝑒

Calculation = Depreciable Value × 𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟′ 𝑠 𝑑𝑖𝑔𝑖𝑡𝑠
3 | DEPRECIATION

 Working/Service hour’s method

Total value of Machine−Salvage value
Depreciation per hour = Estimated life time (hours)
Depreciation Schedule
Year Annual use Rate of deprecation Annual Accumulated
(hours) (Per hour) Depreciation depreciation

Journal Entries relating to purchase of Fixed Assets, depreciation expense, and sale of
fixed assets:
Purchase of Fixed Assets:  For Purchase on Cash- Cash A/c
 When fixed asset is purchased-  For Purchase on Bank- Bank A/c
Related asset A/c Dr.  For Purchase on credit/Account-
Cash/Bank/ Accounts Payable A/c Cr. Accounts Payable A/c
 When expenses of purchasing fixed is
paid-
Related asset A/c Dr.
Cash/Bank A/c Cr.
Recording of Depreciation Expense:
 To Charge Depreciation:
Depreciation A/c Dr.
Accumulated Depreciation A/c Cr.
 To close depreciation Account:
Income Summary A/c
Dr. Depreciation A/c Cr.
Recording of Entries relating to sale of fixed assets:
 If Closing Book Value= Selling price:
Cash/Bank A/c (Sales price) Dr.
Accumulated Depreciation A/c Dr.
Related asset A/c (Cost Price) Cr.
 If Closing Book Value >Selling price:
Cash/Bank A/c (Sales price) Dr.
Accumulated Depreciation A/c Dr.
Loss on Sale of Asset A/c Dr.
Related asset A/c (Cost Price) Cr.
 To close Loss on Sale of Asset A/c:
Income Summary A/c Dr.
Loss on Sale of Asset A/c Cr.
 If Closing Book Value <Selling price:
Cash/Bank A/c (Sales price) Dr.
Accumulated Depreciation A/c Dr.
Related asset A/c (Cost Price) Cr.
Profit on Sale of Asset A/c Cr.
 To close Profit on Sale of Asset A/c:
Profit on Sale of Asset A/c Dr.
Income Summary A/c Cr.
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I. A & Co. acquired a Toy manufacturing machine on 1st January, 2018 at a cost of Tk. 2, 60,000. Installation
and other incidental cost of the machine was Tk. 15,000. The brochure of the machine stated the service
hours as 1, 00,000 effective hours. The estimated scrap value of the machine was Tk. 10,000. During 2018,
2019 and 2020 the machine was engaged in production for 15,000 hours, 20,000 hours, and 18,000 hours
respectively. Show the journal entries and necessary Depreciation Account.
Solution: Calculation of the amount of depreciation:
Depreciation per hour Here, Total value of the machine:
Total value of Machine−Salvage value Cost Price Tk. 2,60,000
= Add: Installation and other cost Tk. 15,000
Estimated life time (hours)
Tk 2,75,000−Tk. 10,000 Tk. 2,75,000
= Salvage value Tk. 10,000
1,00,000 hours
= Tk. 2.65 Estimated life time hours 1,00,000 hours
Depreciation Schedule
Year Annual use Rate of deprecation Annual
(hours) (Per hour) Depreciation
2018 15,000 2.65 39,750
2019 20,000 2.65 53,000
2020 18000 2.65 47,700
A & Co.
Journal Entries
Date Particulars J/P Debit Credit
Taka Taka
2018
Jan. 1 Machine A/C Dr. 2,75,000
Cash /Bank A/C Cr 2,75,000
(Purchase of Machine is recorded)
Dec.31 Depreciation A/C Dr. 39,750
Accumulated Depreciation Cr 39,750
(Depreciation is Charged)
Dec.31 Income Summary Dr. 39,750
Depreciation A/C Cr 39,750
(Depreciation is closed)
2019
Dec.31 Depreciation A/C Dr. 53,000
Accumulated Depreciation Cr 53,000
(Depreciation is Charged)
Dec.31 Income Summary Dr. 53,000
Depreciation A/C Cr 53,000
(Depreciation A/C is closed)
2020 Depreciation A/C Dr. 47,700
Dec.31 Accumulated Depreciation Cr 47,700
(Depreciation is Charge)
Dce.31 Income summary Dr. 47,700
Depreciation A/C Cr 47,700
(Depreciation A/C is closed)
 5 | DEPRECIATION

II. Y & Co. took a Lease costing Tk. 25,000 for 5 years on 1st January 2020 and it was decided to provide a Depreciation Fund for the replacement of the
same at the end of the period. Assuming that the Depreciation Fund Investment realized 5%, the amount chargeable to depreciation is being shown by
"Sinking fund table" 0.180975. Show the workings of the Depreciation Fund Account and the Depreciation Fund Investment Account of all these years.
Solution:
Year Dep. P.V Dep. A/c Opening Opening Dep. Interest Closing Closing Dep.
Value Factor Dep. Fund A/c Fund Investment (5%) Dep. Fund (Cr.) Fund Investment (Dr.)
2020 25,000 0.180975 4,524 - - - 4,524 4,524
2021 25,000 0.180975 4,524 4,524 4,524 226 9,274 9,274
2022 25,000 0.180975 4,524 9,274 9,274 464 14,262 14,262
2023 25,000 0.180975 4,525 14,262 14,262 713 19,500 19,500
2024 25,000 0.180975 4,525 19,500 19,500 975 25,000 25,000
Here,
 Depreciation A/c = Depreciable value × P.V Factor
 Interest = Opening Dep. Fund × Interest rate
 Closing Dep. Fund (Cr.) = Current year’s Depreciation + Opening Dep. Fund + Interest
 Closing Dep. Fund Investment (Dr.) = Closing Dep. Fund (Cr.)
 P.V Factor =[r/ (1+r) ^n−1], r = Interest rate.