CHAPTER 5 ACCOUNTING FOR DEPRECIATION AND DISPOSAL OF ASSETS TERMS ACCUMULATED DEPRECIATION » Total depreciation charged to date is deducted from asset in Balance Sheet. ASSET REGISTER » Complete record of individual assets. BALANCE SHEET » Statement of assets, liabilities and owner’s equity at a particular date. CURRENT ASSETS » Assets expected to be converted to cash within 12- month period. TERMS cont... DEPRECIATION » Amount charged as an expense against revenue earned by the asset over its useful life. DISPOSAL OF ASSET ACCOUNT » Allows the: original cost of assets accumulated depreciation amount received on disposal to calculate profit or loss on disposal. NON-CURRENT ASSET » Asset expected to be retained by the business for period in excess of 12 months. TERMS cont... PROFIT AND LOSS ACCOUNT » Compares revenue items with expense accounts to calculate Net Profit or Loss of a business. PROFIT OR LOSS ON DISPOSAL » Amount calculated in disposal account. REDUCING BALANCE METHOD OF DEPRECIATION » Uniform percentage of depreciation applied to written down value of asset. TERMS cont... REGISTER OF PROPERTY, PLANT AND EQUIPMENT » Complete record of individual asset. » Manual or computerised. RESIDUAL VALUE » Amount asset is expected to be sold for after end of useful life. STRAIGHT LINE METHOD OF DEPRECIATION » Depreciation cost allocated evenly over life of asset. NON-CURRENT ASSETS Acquired for use in the business. Not for resale. Expected use more than 12 months e.g. – Land and Buildings – Plant and Equipment – Motor Vehicles – Office Furniture – Shop Fittings – Computer Equipment CAPITAL COST OF NON- CURRENT ASSETS Cost of getting the asset operational. Associated cost added to cost of asset e.g. – Delivery charges – Installation costs – Integrated software in computer systems These costs add to the value of an asset before depreciation is calculated. AUSTRALIAN ACCOUNTING STANDARDS AASB 1021 PARAGRAPH 5.2 In estimating the useful life of a depreciable asset, consideration must be given to the following factors: (a) Expected physical wear and tear (b) obsolescence; and (c) legal or other limits in the use of the asset. Depreciable amount to be allocated from time asset is first put to use. DEPRECIATION Recorded in General Journal DATE PARTICULARS DR CR 30June 03 DEPRECIATION – $7 500 MOTOR VEHICLE $7 500 Acc. Depreciation – Motor Vehicle Depreciation charged at 25% DEPRECIATION ACCOUNTS Depreciation Expense Account – Closed off to Profit and Loss at Financial year end. – Depreciation expense is debited to this account. DEPRECIATION EXPENSE 30 June 03 Acc. Depn $1000 30 June 03 Profit & Loss $1000 Accumulated Depreciation Account Shows total amount of depreciation accumulated since asset first used. Not closed off; balance sheet account. ACCUMULATED DEPRECIATION June 03 Depn $1000 June 04 Depn $1000 June 05 Depn $1000 $3000 BALANCE SHEET ASSETS Asset shown at original cost Less: accumulated depreciation Asset net value BALANCE SHEET (EXTRACT) Non-Current Assets Motor Vehicles $50,000 Less: Acc. Depreciation $15,000 $35,000 METHODS OF DEPRECIATION ACCOUNTING STANDARDS » Do not specify a particular method of depreciation. – Depreciation Methods » “Units of Use” method - based on items produced » “Sum of Digits” method » “Straight-line” method » “Reducing Balance” method AUSTRALIAN TAX OFFICE Allows – Straight Line method – Reducing Balance method to calculated allowable deduction STRAIGHT LINE METHOD ACCOUNTING TREATMENT ASSET COST $20,000 EXPECTED RESIDUAL VALUE $2,000 DEPRECIABLE VALUE $18,000 LIFE IN 4 YEARS DEPRECIATION EXPENSE EACH YEAR (25%) $4,500 Asset Cost Dep’n Exp Acc. Dep’n Year 1 $20,000 $4,500 $4,500 Year 2 $4,500 $9,000 Year 3 $4,500 $13,500 Year 4 $4,500 $18,000 REDUCING BALANCE METHOD ASSET COST $20,000 DEPRECIABLE VALUE 25% DEPRECIATION EXPENSE 25% WDV EXPECTED RESIDUAL VALUE $2 000 Asset Dep’n Exp Acc. Dep’n Reduced Cost Value Year 1 $20,000 $ 5 000 $ 5 000 $15 000 Year 2 $ 3 750 $ 8 750 $11 250 Year 3 $ 2 813 $11 563 $ 8 437 Year 4 $ 2 109 $13 672 $ 6 328 CAN BE FURTHER DEPRECIATED TO RESIDUAL VALUE OF $2 000 DISPOSAL OF DEPRECIABLE ASSET Original Cost of Asset Accumulated DISPOSAL Depreciation ACCOUNT for Asset Cash Receipts or General Journal Profit and Loss Account STEPS TO DISPOSE OF ASSET 1. Calculate depreciation to date of sale. 2. Open Disposal Account in Ledger. 3. Transfer Asset cost of disposal account. DR: Disposal Account CR: Asset Account 4. Transfer Accumulated depreciation to Disposal Account. DR: Accumulated Depreciation Account CR: Disposal Account 5. Credit Disposal Account with Money Received for Asset. DR: Bank CR: Disposal Account 6. Profit or loss is calculated on difference between debits or credits. ASSET REGISTER Detailed Information on individual assets FUNCTIONS: 1. Internal control identifies asset and location. 2. Shows complete history for individual assets. 3. Allows access to information used to calculated depreciation.
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