Form 3 Book Keeping – DEPRECIATION OF FIXED ASSETS-1

DEPRECIATIAON
Definition.

Is the decrease in value of assets or is the fall of value of Assets.

What factors causes Depreciation.

1) Physical deterioration or Tear and Wear, caused by sun, wind, duff resting, or frequent use of an asset and other weather element.

2) Economic factors. Asset becomes outdated even through it is in good physical condition.

3) Time factors. Physical economic factors caused by out dated or fashion out or style.

4) Depletion factors. Natural resources, mining’s, oil wells.

5) Amortization factors. Introduce Goodwill, trademarks, copyrights.

METHODS OF CALCULATING DEPRECIATION.

There are three method of calculating Depreciation, These are:-

1) Straight line method/equal installment/ cost price.

2) Diminishing balance method or declining OR reducing balance method.

3) Revaluation.

1. STRAIGHT LINE METHOD.

Equal amount of an asset charged each year for Depreciation.

Using this method, certain percentage of the original cost of the asset is taken in a year.

The money amount is the depreciation for the years and the cost of the fixed asset less the total depreciation is equal to the net book value.

Example.

A machine is purchased for TSHS 6,000 on 1 June 2000. It is to be depreciation by the straight line method at 10% each year. The firm financial year end at 31 December.

Calculation of Depreciation.

=cost price x10/100=600

The depreciation for each year is 600.

Cost price at 1st January 2000		6,000
less:	Depreciation for Dec2000	600
		5,400
less:	Depreciation for Dec2001	600
		4,800
less:	Depreciation for Dec2002	600
Net book value at 31/12/2002		4,200

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2. DIMINISHING / REDUCING BALANCE METHOD.

Amount of Depreciation charged according to the book value of the assets.

With this method a certain percentage of the money reduced (or diminishing) balance of start of each year is taken as the depreciation for the year.

Example.

A machine is purchased for Tshs 6000 on 1st January 1991. It is to be depreciation by the reducing balance method at 12% each year. The firm financial years end 31st December.

The machines will depreciate follows.

Cost at 1st 1991	6,000
Less: Depreciate for 1991 (12% of 6000)	720
Book of values at 31st Dec 1991	5,280
Less: Depreciation for 1995(12% of 5280)	634
Book of value 31st Dec 1992	4,646
Less: Depreciation 1993 (125of 4646)	558
Book of value of 31 Dec 1993	4,088

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NOTE.

The reducing balances method provides decreasing amount of depreciation 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.

3. REVALUATION METHOD OF DEPRECIATION.

The two previous method of calculation depreciation applied a certain percentage each year either to the cost of asset (straight line method) or to the reduced balance.

A third method for calculating depreciation is to value the fixed assets each year and the result fall in values during the year is the amount of depreciation for that year.

Example.

Office equipment is bought for Tshs 2,000 on 1st January 1995 it is devalued as follows.

31st December 1995 Tshs 1,600

31st December 1996 Tshs 1,350

31st December 1997 Tshs 1,000

Therefore depreciation amount will be; – for 1995 ……………………..Tshs 400

1996 ……………………..Tshs 250

1997 ……………………..Tshs 350

NOTE.

The revaluation method is often used for low cost fixed assets such as stock of work store tools or small items of office equipments which are frequently added during the year end.

Other methods may include the following;-

METHODS OF RECORDING FOR DEPRECIATION

A. NEW METHOD/ MODERN METHOD.

-Always fixed assets shown at cost prices remain constant fixed.

-Amount of depreciation accumulated to provision for depreciation a/c.

-Only amount of depreciation for current charged to profit or loss a/c.

-Always fixed assets shown at cost price.

B. OLD METHOD.

Example.

A machine in purchased for Tshs 2,000 on 1st January 1991. It is to be depreciated by the straight line method at 10% each for three years..

DR MACHINERY CR
DATE	DETAILS	F	AMOUNT	DATE	DETAILS	F	AMOUNT
1-Jan-91	cash		2,000	31-Jan-91	Depreciation		200
				31-Dec-91	Balance c/d		1,800
			2,000				2,000
1-Jan-92	Balance b/d		1,800	31-Dec-92	Depreciation		200
				31-Dec-92	Balance c/d		1,600
			1,800				1,800
1-Jan-93	Balance b/d		1,600	31-Dec-93	Depreciation		200
				31-Dec-93	Balance c/d		1,400
			1,600				1,600
1-Jan-94	Balance b/d		1,400

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DR MACHINERY DEPRECIATION A/C CR
DATE	DETAILS	F	AMOUNT	DATE	DETAILS	F	AMOUNT
31-Jan-91	machinery		200	31-Jan-91	profit and loss a/c		200
31-Dec-92	machinery		200	31-Dec-92	profit and loss a/c		200
31-Dec-93	machinery		200	31-Dec-93	profit and loss a/c		200

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DR EXTRACT PROFIT AND LOSS A/C CR
31-Jan-91	machinery depreciation	200
31-Dec-92	machinery depreciation	200
31-Dec-93	machinery depreciation	200

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EXERCISE

1994 bought motor van costing 2,000,000 depreciation is to be charged at the rate of 5% per annum using straight line method for five years respectively.

DR			MOTOR VAN				CR
Date	Particulars	folio	Amount	Date	Particulars	folio	Amount
Jan-94	Cash		2,000,000	31/12/1994	Depreciation		25,000
				31/12/1994	balance c/d		1,975,000
			2,000,000				2,000,000
Jan-95	balance b/d		1,975,000	31/12/1995	Depreciation		25,000
				31/12/1995	balance c/d		195,000
			1,975,000				1,975,000
Jan-96	balance b/d		1,950,000	31/12/1996	Depreciation		25,000
				31/12/1996	balance c/d		1,925,000
			1,950,000				1,950,000
Jan-97	balance b/d		1,925,000	31/12/1997	Depreciation		25,000
				31/12/1997	balance c/d		1,900,000
			1,900,000				1,925,000
Jan-98	balance b/d		1,900,000	31/12/1998	depreciation		25,000
				31/12/1998	balance c/d		1,875,000
			1,900,000				1,900,000
1/12/1999	balance b/d		1,875,000

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DR	MOTOR VAN DEPRECIATION A/C						CR
Date	Particulars	f	Amount	Date	Particulars	f	amount
31/12/1994	motor van		25000	31/12/1994	To P&L		25000
31/12/1995	motor van		25000	31/12/1995	To P&L		25000
31/12/1996	motor van		25000	31/12/1996	To P&L		25000
31/12/1997	motor van		25000	31/12/1997	To P&L		25000
31/12/1998	motor van		25000	31/12/1998	To P&L		25000

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EXTRACTED BALANCE SHEET AS AT 31st DEC
LIABILITIES	ASSETS
	FIXED ASSET
	1994	motor van	2000000
		Less. Depreciation	25000	1975000
	1995	motor van	1975000
		Less. Depreciation	25000	1950000
	1996	motor van	1950000
		Less. Depreciation	25000	1925000
	1997	motor van	1925000
		Less. Depreciation	25000	190000
	1998	motor van	190000
		Less. Depreciation	25000	187500

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Example 2

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 and extracted balance sheet for four years.

WORKING;-

Motor vehicle at cost		400,000
Less depreciation 31/12/90 – (400000 15/100)		60,000
Balance of motor vehicle at book	value	340,000
Less depreciation 31/12/1991 (340,000 115/100)		51,000
Balance of motor vehicle at book value		289,000
Less depreciation 31/12/1992 (289000 15/100)		43,350
Balance of motor vehicle at book value		245,650
Less depreciation 31/12/1993 (245650 15/100)		36,848
Balance of motor vehicle at book value.		208,802

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DR			MOTOR VEHICLE	A/C			CR
Date	particulars	f	Amount	date	particulars	f	amount
1/1/1990	cash		400,000	31/12/1990	Depreciation		60,000
				31/12/1990	balance c/d		340,000
			400,000				400,000
1/1/1991	balance b/d		340,000	31/12/1991	Depreciation		51,000
				31/12/1991	balance c/d		289,000
			340,000				340,000
1/1/1992	balance b/d		289,000	31/12/1992	Depreciation		43,350
				31/12/1992	balance c/d		245,650
			289,000				289,000
Jan-93	balance b/d		285,650	31/12/1993	Depreciation		36,848
				31/12/1993	balance c/d		208,802
			545,650				545,650
31-Jan	balance b/d		208,802

The general Emma has PLANT AND MACHINE as on asset bought at 30^th June 1995 for cash 700,000 came to you and ask you to help him to show the depreciate of that asset in relevant account statement . The depreciation method is reducing balance method at not of 20% for four years.

WORKING

PLANT AND MACHINE at cost				700,000
Less depreciation 31/12/1995 (700000 ×20/100× ½)				70,000
Balance of machine at book value				630,000
Less depreciation 31/12/1996 (630000× 20/100× ½)				63,000
Balance of machine and plant at the book value				567,000
Less depreciation 31/12/1997 (567000 ×20/100× ½)				56,700
Balance of plant and machine at book value				510,300
Less depreciation 31/12/1998 (510300× 20/100× ½)				51,030
Balance plant and machine of book value				459,270

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DR PLANT AND MACHINE A/C CR

Date	Particulars	amount	dates	particulars	f	amount
1/6/1995	cash	700000	31/12/1995	Depreciation		70,000
			31/6/95	balance c/d		126,000
		700,000				100,800
1/7/1996	balance b/d	630000	31/07/1996	Depreciation		126,000
			31/07/1996	balance c/d		504,000
		630000				630,000
1/8/1997	balance b/d	504,000	31/08/1997	depreciation		100,800
			31/08/1997	balance c/d		403,200
		567,000				504,000
1/9/1998	balance b/d	403,200	31/9/98	Depreciation		80,640
			31/9/98	balance c/d		322,560
						403,200

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DR DEPRECIATION FOR PLANT AND MACHINE A/C CR

Date	particulars	Amount	Date	Particulars	f	Amount
31/6/95	Plant and machines	70,000	31/12/1995	To p&L a/c		70,000
31/07/1996	Plant and machines	126,000	31/07/1996	To p&L a/c		126,000
31/08/1997	Plant and machines	100,800	31/08/1997	To p&L a/c		100,800
31/9/98	Plant and machines	80,640	31/09/1998	To p&L a/c		80,640

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DR EXTRACT PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31 07 1995 CR
31/6/95	Depreciation Plant machine	700,000
31/07/96	depreciation Plant machine	126,000
31/08/98	depreciation Plant machine	100,800
31/9/99	depreciating Plant machine	80,640

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EXTRACTED BALANCE SHEET AS AT 1995

LIABILITIES		ASSETS
		FIXED ASSETS
	1995	Plant and machine	700,000
		less: depreciation	70,000	630,000
	1996	Plant and machine	630000
		less: depreciation	126,000	504,000
	1997	Plant and machine	504,000
		less: depreciation	100,800	403,800
	1998	Plant and machine	403,200
		less: depreciation	51030	322,560

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QUIZ

On 1/1/1989 bought furniture costing 150,000 depreciation to be at the rate of 13 1/3 % per annum using straight line method for three years.

DR FURNITURE A/C CR

DATE	PARTICULARS	AMOUNT	DATE	PARTICULARS	AMOUNT
1/1/1989	cash	150,000	31/12/1989	depreciation	20,000
			31/12/1989	balance c/d	130,000
		150,000			150,000
1/1/1990	balance b/d	130,000	31/12/1990	depreciation	20,000
			31/12/1990	balance c/d	110,000
		130,000			130,000
1/1/1991	balance b/d	110,000	31/12/1991	depreciation	20,000
			21/12/1991	balance c/d	90,000
		110,000			110,000
1.1/92	balance b/d	90,000			90,000

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DR DEPRECIATION OF FURNITURE A/C CR

Date	F	particulars	Amount	date	particulars	f	amount
31/12/1989		furniture	20,000	31/12/1989	P&L A/C		20,000
31/12/1990		furniture	20,000	31/12/1990	P&L A/C		20,000
31/12/1991		furniture	20,000	31/12/1991	P&L A/C		20,000
31/12/1992		furniture	20,000	31/12/1992	P&L. A/C		20000

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DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31 12 1989 CR
31/12/1989	Depreciation furniture	20,000
31/12/1990	Depreciation furniture	20,000
31/12/1991	Depreciation furniture	20,000
31/12/1992	Depreciating furniture	20,000

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BALANCE SHEET AS AT 31 12 1989

LIABILITIES		ASSETS
		FIXED ASSETS
	1989	FURNITURE	150,000
		less: Depreciation	20,000	130,000
	1990	FURNITURE	130,000
		less: Depreciation	20,000	110,000
	1991	FURNITURE	110,000
		less: Depreciation	20,000	90,000

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