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Depreciation and disposal

of fixed assets
lecture 19

Objectives
You

should be able to:

Calculate

depreciation on asset brought or sold


within an accounting period.
Incorporate depreciation calculation into the
accounting records
Record the entries relating to disposal of fixed
assets.

Depreciation provision and assets


bought and sold
There

are two ways to calculate assets


bought or sold during a period:
Ignore

the date of purchase and simply


calculate a full period depreciation at the end
of accounting period. Thus, during the year
where the asset is being disposed, there will
be no depreciation charged.
Provide depreciation on the basis of one
month ownership = one months provision for
depreciation.

Double entry for depreciation

Recording depreciation in the ledger:


Debit Profit and loss account
Credit Provision for depreciation account

Example:
In a business with financial years ended 31 Dec, a machine is bought for $2000 in 30
June 20X6. The second machine is bought for $4000 in 31 Sept 20X7. The machines
are to be depreciated at the rate of 20% using straight line method. The record for the
first three years are:
Workings:
20X6s depreciation

: 2000 x 20%x 6/12=

$200

20X7s depreciation

: 2000x20% =

$400

: 4000x 20% x 3/12 =

$200
$600

20X8s depreciation

:20% x 6000 = $1 200

Machinery

Provision of
depreciation
20X6

20X6

20X6

20X6

May 31 Cash
2000

Dec 31 Balc/d
2000

Dec 31 Bal c/d


200

Dec 31 Profit &


Loss
200

20X7

20X7

20X7

20X7

Jan 1 Bal b/d


2000

Dec 31 Bal
c/d 6000

Dec 31 Bal c/d


800

Sept 30 cash
4000

_____

800
20X8

6000

6000

20X8

20X8

Jan 1 Bal b/d


6000

Dec 31 Bal
c/d 6000

Jan 1 Bal b/d


200
Dec 31 Profit &
loss
600
800
20X8

Dec 31 Bal c/d


2000
2000

Jan 1 Bal b/d


800
Dec 31 Profit &
Loss 1200

Recording depreciation in the profit and loss


account and balance sheet.
Profit and loss a/c (extract) for the year ended 31 dec
20X6 Depreciation-Machinery
20X7 Depreciation-Machinery
20X8 Depreciation-Machinery

Balance Sheet as at 31 Dec


20X6
Machinery
Less Provision for depreciation
20X7
20X8

(200)
(600)
(1200)

2000
(200)

1800

Machinery
Less Provision for depreciation

6000
(800)

5200

Machinery
Less Provision for depreciation

6000
(2000)

4000

Disposal of fixed assets

Upon the sales of fixed asset, we will want to remove it from


our ledger account. The accounting entries needed are:
1.

2.

3.

4.

Transfer the cost of asset sold to an asset disposal account


Dr Asset disposal Account
Cr Asset account
Transfer the accumulated depreciation of the asset to the disposal
account
Dr Provision for depreciation Account
Cr Asset disposal account
Amount received from disposal
Dr Cash book or Asset account (Trade in)
Cr Asset disposal account
Transfer the difference to the profit and loss account (If the credit side
of the asset disposal account is more than the debit side, there is a
profit on disposal, vice versa)

Example

A machine A worth $5000 has been bought by the business in


year 20X6 and another machine B worth $6000 in year 20X7.
Machine A was disposed in the 31 Jan 20X8 for $2000. Another
buyer has agreed to trade in a new machine worth $5000 for
machine B at the same date. All the machine are to be
depreciated 20% using the straight line method per annum
regardless of the date of purchase and no depreciation is to be
charged during the year of sale.
Workings:
Year 2006 : Depreciation for machinery =$1000
Year 2007 : Depreciation for machinery =$2200
Year 2008: Depreciation for machinery =$1000
Accumulated depreciation for Machinery A= $ 2000
Accumulated depreciation for Machinery B= $ 1200

Machinery
20X6

20X6

20X6

Dec 31 Cash
5000

Dec 31 Balc/d
5000

20X7

20X7

Jan 1 Bal b/d


5000

Dec 31 Bal c/d


11000

Sept 30 cash
6000

_____

20X8
Jan 1 Bal b/d
11000
Jan 31
Disposal of

Dec 31 Bal c/d


1000

Dec 31 Profit &


Loss
1000

20X7

20X7

Dec 31 Bal c/d


3200

Jan 31 Disposal
of
machinery A
5000
Disposal

Dec 31 Profit &


loss
2200
3200

Jan 31 Disposal
of

20X8

Jan 1 Bal b/d


1000

3200
20X8

11000
11000

Provision of
depreciation
20X6

machinery A
2000
Disposal
of

20X8
Jan 1 Bal b/d
3200
Dec 31 Profit &
Loss 1000

Disposal of
Disposal of
machinery
A Provision for
machinery
B Provision for
Jan 31
Jan 31
Jan 31
Jan 31
depreciation Machinery
depreciation
Machinery
2000
1200
5000
6000
Cash
2000
_____

loss on
disposal 1000

5000

Machinery
5000

Profit on
disposal 200

6200

6200

5000

Profit and loss account for the year ended 31 Dec


20X6 Depreciation

(1000)

20X7 Depreciation

(2200)

20X8 Profit on disposal


Less Depreciation1000
loss on disposal

200
1000

(2000)

(1800)

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