DEPRECIATION

DEPRECIATION OF NON- CURRENT ASSETS.

DEPRECIATIAON: Is the fall (decrease) in value of non
current assets.
• Non current assets. Are those assets materials value
which are of long life, to be used in business, not to be
bought with the main purpose of sale.
• Depreciation is a part of cost of a non current assets
consumed during the periods of the use by the firm. It is
expenses.
• The amount of depreciation charges is transferred to
income statement at the end of accounting period as
Expenses and therefore reduce net profit
 FACTORS CAUSES DEPRECIATION
1) Physical deterioration or Tear and Wear,
caused by sun, wind, rusting, or frequent use of
an asset and other weather element.
Tear and Wear. This refers to the damage
occurring to the fixed assets from normal use ie
break down of machines.
Erosion, rust, rot and decay: land may be eroded
by the action of wind, rain. Metal may rust.
Wood may rot or decay is a process which will
also be present due to element of nature and the
lack of proper attention.
2 Economic factors. Lead to an item out of use
even though it is in good physical condition.
(a) Obsolescence. This is the process of
becoming out-of-date. This is caused by the
new innovation due to improvement of
technology
(b) Inadequacy. This occur when an assets no
longer used because of growth and change in
the size of the firm.
3 Time factors. Caused by out dated or fashion
out or style. Asset which have a legal life fixed in
term of year. This is called lease when the years
have passed, the lease is worth nothing to you.
As it has finished.
A similar asset is where you buy a patent so
that only you are able to produce something.
When the patent’s time has finished it then has
no value. Instead of using the term depreciation,
the term amortizations often used for these
assets. Amortization.
• Amortization is the technique to pay off an
obligation such as loan or mortgage gradually
by periodic payments of principal and interest
in order to reduce or write off the cost of an
asset.
4 Depletion factors. Other assets are of
wasting character, perhaps due to the
extraction of raw materials from them. Natural
resources such as mines, quarries and oil wells
come under this heading. To provide for the
consumption of an asset of a wasting character
is called provision for depletion.
 LAND AND BUILDINGS
• land does not normally depreciate. Buildings do,
however, eventually fall into disrepair or become
obsolete and must be subject to a charge for
depreciation each year.
• Appreciation is an increase in value of fixed
asset.
 PROVISION FOR DEPRECIATION AS AN ALLOCATION OF
COST
• Depreciation in total over the life of a fixed asset can be
calculated quite simply as cost less the amount
receivable when the fixed asset is put out of use by the
business.
• This amount receivable is normally referred to as the
residual value (‘scrap value’) of an asset. If the item is
bought and sold for a lower amount within the same
accounting period, then the difference in value is
charged as depreciation in arriving at that period’s net
profit
• Residual value (‘scrap value’) refers to the
estimated value of an asset after the asset has
reached its end of useful life or fully
depreciated
METHODS OF CALCULATING DEPRECIATION CHARGES
1. Straight line method /Equal installment/ cost price.
• Depreciation is charged constantly over the useful
life of the asset.
• Depreciation is calculated as a fixed amount every
year or a fixed percentage of the original cost
• In this method, residual value, scrap value or the
expected value of the non- current asset and the
cost of an asset are taken into consideration when
calculating depreciation of the non-current asset.
 D = CA - ERV
ULA
Whereby:
D = Depreciation; CA = Cost of an Asset
ERV = Estimated Residual Value;
ULA = Useful Life of an Asset (Number of year)
Depreciation = (CA - ERV) × Depreciation Rate
Depreciation = Cost − Estimated disposal value
Number of expected years of
use
• For instance, if a lorry was bought for £22,000
and we thought we would keep it for four
years and then sell it for £2,000 the
depreciation to be charged each year would
be:
(22 000 -2000) = 5000
4
Depreciation each year for four year = 5,000
 Example 02
ABC Ltd company on 1ST January 1995
purchased a Bus costing Tsh 1,000,000 and the
bus is estimated a useful life of 10 year leaving
a scrap value of Tsh 100,000.The company
charge depreciation using a straight line bases.
Required: Prepare the following account in the
books of ABC Ltd Company.
i) Bus account for three years.
ii) Provision for depreciation
 Exercise 01:
• JMC Ltd Company is dealing with purchasing
and selling of used cars from Japan, on 1st
January 1998 bought a motor van costing Tsh
80000 it is the company policy to charge
depreciation at the rate of 5 % p.a .Using
straight line method the company also close up
the books at 31st December each year
Required: Open the following account in the
books of JMC Ltd Company
i) Motor van account for Four years
ii) Depreciation account
2. DIMINISHING / REDUCING BALANCE
METHOD/ DECLINING BALANCE METHOD..
• Under this method, depreciation is charged as
a percentage of the written down or book
value of the asset (cost minus accumulated
depreciation).
• At the beginning of the period, the
depreciation cost is zero.
• Written down value is an accounting term for
reduction in the book value of an asset when
its fair market value (FMV) has fallen below
the carrying book value, and thus becomes an
impaired asset.
• Depreciation charged decreases over the useful
life of the asset each year in the second year the
amount is less than in first, in the third year it is
less than the second year and so on.
• Depreciation = (Cost of an asset - Accumulated)
x Depreciation rate
Net Book Value = Cost – Accumulated Depreciation charges
If Depreciation rate is not given
• When depreciation rate is not given use the following

Depreciation rate = 1 −(𝑛√𝑠/𝑐x 100)

formulary to calculate the rate of depreciation.

Where by
n= Number of year
S= scrap vale /Residual value
C = Cost of an assets
• Example 01
• A motor vehicle was bought on 1st January
1990 at cash price of 400,000. The company
decide to depreciate the vehicle by 15% per
annum using diminishing balance method for
four years.
• Your required to show relevant A/C for four
years.
3. SUM OF THE YEAR DIGIT METHOD
• Is the method of changing depreciation where
by the amount of depreciation will initial
greater and eventually will start to
decrease.
• This method gives depreciation for each year
based on the proportion of the remained year
of charging depreciation to the sum of all
years of useful life of assets
 n (n + 1)
2
• Example 1
• ALLY’S Ltd Company purchased machinery on
1st Jan 1998 for Tsh 30000 the company policy
is to charge depreciation by using sum of the
year digit. The company policy is to charge
depreciation by using sum of the year digit
method and the assets is estimated to live for
4 years
• Basis of calculating Depreciation
– One-month ownership basis
• This is a basis of calculating depreciating a non-current asset
where the amount of depreciation charge is calculated on every
month an asset bought or sold is held in a business. It involves
calculating the amount of depreciation for each month a non
current asset is held in a business.
– Full year basis
• Under this basis the amount of depreciation charge is calculated
on the assumption that an asset is held in the business for a
whole accounting period. Thus, the amount of depreciation is
calculated for a full year regardless the month an asset is
bought.
 NOTE:
• When a full year basis is used, no depreciation is charged
on the year of disposal for a non- current asset.
• Provision for depreciation on noncurrent assets
• Provision for depreciation is amount set aside out of profit
to meet the fall in value of a non current asset during its
useful life in a business for replacement purpose.
• When provision is created, the amount is transferred to
income statement, i.e. profit and loss account at the end
of financial year using an account known as a provision
for depreciation account/ accumulated depreciation
account.
 Accounting entries
• A. To record the cost price of a non current
asset bought.
DR: Asset account
CR: Cash/bank account
• B. To record the amount of depreciation charge
at the end of accounting period
DR: Income statement
CR: Provision for depreciation account
3. REVALUATION METHOD OF DEPRECIATION.
• This method involves determining the difference between
the value of a non- current asset at the beginning and at
the end of an accounting period.
• The difference between these values is considered as
depreciation.
• Revaluation is determined by taking into consideration the
market value of a non-current asset at the end of an
accounting period.
• The amount of depreciation is calculated by comparing the
value of a non current asset between two different years.
• The revaluation method is an accounting
approach where the carrying value of a non-
current asset is regularly adjusted to reflect
its fair market or current value.
• The formula used under this method is given
as:
• Depreciation = Original cost - New cost after
revaluation
 DISPOSAL OF NON-CURRENT ASSETS
DISPOSAL is a process of making an asset free from one’s
ownership by either selling it or leaving it.
Disposal: Means the sale of an assets which had already
used in business
• This is when the firm decides to resale the asset after
depreciation or due to some certain conditions.
• The firm may decide to resale the asset after they
have depreciated because the assets are no longer
productive.
1. A motor van is bought on 1st January 1985 for shs. 10,000
and another one on 1st October 1986 for shs. 12,000.
The first motor van is sold on 30 June 1987 for shs. 7,200.
The firm’s financial year ends on 31 December. The motor
van is to be depreciated at ten per cent. Using the straight
line method and based on Assets in existence at the end
of each year ignoring items sold during the year.
Required: Prepare
Motor vans account
Provision for depreciation on motor vans
Disposal Account
ABC company bought two buses on the dates shown below:
1st January 1997: bought the first bus for shs. 30,000
1st July 1998: bought the second bus for shs. 50,000
On 30th June 1999, the bus which cost shs. 30,000 was sold for
shs. 22,000 cash. The firm’s financial year ends on 31 st
December each year. The bus is to be depreciated at the rate
of 10% per annum using the straight line method and based on
the assets’ existence at the end of each year, ignoring items
sold during the year.
Required
• Show in the books for the first three years:
• Provision for depreciation on bases
• Buses disposal account.
 JMC Company bought a Motor car costing Tshs 2,500,000 on 1st
January 2010, and another one on 1st January 2011 for Tsh
3,000,000. On 30 June 2012, the Company bought another Motor
car for Tsh 1,000,000. The first Motor car was sold on 30Th April
2014 for Tsh 1,500,000. The firm s financial year end on 31st
December. The Motor car is to be depreciated at the rate of 20% p
a using Straight line method and based on assets in existence at
the end of each year, ignoring items sold during the year.
Required:
(a) Motor cars account.
(b) Provision for depreciation on Motor cars account.
(c) Motor cars Disposal account.
(d) Extracted statement of financial position.
 EXAMPLE
• Fuoni Enterprise whose financial year ends 31st December every year,
bought two buildings in the village namely N1 and N2 both on 1st
January 2015 for TZS 6,400,000 and TZS 3,700,000 respectively. Fuoni
enterprise, also bought the third and fourth building namely N3 and N4
on 1st July 2017 for TZS8,730,000 and on 1st October 2017 for TZS
5,700,000 respectively. The first two buildings, that is, N1 and N2 were
sold for a price of TZS 2,530,000 on 30th September 2018 and TZS
2,740,000 on 30th June 2019 respectively. Depreciation on these
buildings is 25 percent per annum calculated using straight line method.
Required:
• Prepare buildings account
• Prepare accumulated depreciation account
• Prepare disposal of building account
• Prepare extracts of the income statement and the statement of
financial position for the year ended 31st December 2015, 2016, 2017,
2018 and 2019.
• BAD DEBTS AND PROVISION FOR BAD DEBTS / PROVISION
FOR DOUBTFUL DEBTS
BAD DEBTS
Bad debts refer to those debtors who will not be able to pay
their debts due to various reasons.
-Are debt that a business will not be able to collect. This could
happen if the debtors simply could not pay the debt
-Are risks which are under taken when some of the customers
[debtors] fail to pay their debts. The debts failed to be paid
are the expenses for the firm and transferred to the income
statement at the end of the period.
• Has been declared bankrupt, when these
debtors cannot meet debt obligations
– Has refused to pay one of a number of invoices
– Has refused to pay part of the invoices
– When it is concluded that the debtor cannot meet
his/her obligation, e.g., incapacitated, dead etc.
 PROVISION FOR BAD DEBTS
• These are the amount which the owner for
the business doesn’t expect to be paid [total
written off.
• The treatment of this amount should be;-
• Dr: profit and loss a/c
• Cr: provision for bad debts a/c
 NOTE.
-Bad debts is used only when the debt has been
proved to be a bad and is written off
-Both accounts are charged in the income
statement for the year to get the full amount of
bad debts that have occurred from sales made
during the year.
-In the statement of financial position only provision
for bad debts is deducted from the figure of
debtors so as to get the correct value of debtors
 Methods used in estimating bad debts
1. by looking at each debt and estimating which
ones will be bad debts
2. by estimating on the basic of experience what
percentage of the debts will prove to be bad
debts
• On the 1st January 2005, Mabula started up a new business. During the
year ended 31stDecember 2005. The following debtors were found to be
bad and were written off on the dates indicated below;
Date Names/Debtors Amount Tshs
30/03/2005 Hadija 88,000/=
30/05/2005 Tunae 51,000/=
31/08/2005 Hayupo 9,600/=
• On 31st December 2005, schedule of debtors amounted to Shs
5,480,000/= and after an examination it was decided to make a provision
for doubtful debit of Shs. 176,000.
Required Prepare;
a) Bad debits account
b) Provision for bad debts account
c) Statement of financial position extracts showing how debtors are
displayed as on 31stDecember 2005
 Example o2
During the year 2021, Michenzani Traders had several debtors (let us assume 20)
but two of them turned to be bad debts. One among those debtors is
Kishegeshe Enterprise. The other one is Mugabe Enterprises. Transactions that
took place in 2021 in relation to these debtors who eventually turned to be bad
are as follows:
3rd March, 2021 goods worth TZS 600,000 were sold on credit to Kishegeshe
Enterprise.
19th May, 2021 goods worth TZS 300,000 were sold on credit to Mugabe
Enterprises.
2nd June, 2021 Kishegeshe paid Michenzani Traders TZS 200,000 in terms of cheque.
13th October, 2021 both Kishegeshee Enterprise and Mugabe Enterprises were
declared bankrupt thus unable to pay their debts.
Required:
• Pass necessary ledger transactions in the books of Michenzani Traders to show
the effect of bad debts.
The Trial balance of JR . Ltd as at 31st .12.1990 show the following balances
Narration DR CR
Stock 1.1.1990
4000
Purchases
9000
Sales
15000
Returns
800 300
Carriage inward
400
Wages
1500
Insurance
600
Commission
1000
Rent
700
Premises
20000
Bank
12000
Drawing
21000
Loan from NBC
8000
Capital 44300
69,300 69,300
 Additional information
i/ Stock in trade 31.12.1990 Tshs 6000
ii/ Outstanding wages Tsh 800 and commission
Tsh500
iii/ Prepaid insurance Tsh 150 and rent Tsh180
Required: Prepare Trading, Profit and loss
account and the balance sheet as on 31st Dec
1990