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Now understanding reducing balance method
Excuse sir what will happen if didn’t mention the purchase month or date of asset
Hi, I realise this won’t come up in an exam I’m just curious what would happen if you decided to change depreciation policy. If you can’t have different styles of depreciation on the same SOFP would business have to recalculate all their accumulated depreciation?
Yes – if a business changes its policy then they should recalculate as though that policy had always been in place.
I’m on AAT level 3 Advanced bookkeeping, I am watching ACCA videos as well.
It stated in the book businesses only tend to change their policies on an annual basis, but tend to stick to the same method every year. It states businesses constantly review the situation annually.
why in this example did you not account for the 9 months while calculating depreciation?
for the first year*
Because the question says that the policy is to charge a full tears depreciation in the year of purchase, which is a very common policy.
(I assume you have downloaded the free lecture notes and so have the question in front of you?)
Thank you Sir. You said to do a pro rata to the nearest month. In a situation where the date is, say, 30th April,do we take May as the nearest month?
If it was bought on 30th April, then yes – you start counting from May 馃檪
But do appreciate, that this only applies if it is pro-rata depreciation, and also this is only for the exam – in practice you can have any policy you want.
Noted with thanks:)
You are welcome 馃檪
Dear John! Perhaps I missed this in one of the lectures, but, on the reducing balance method the amount to be depreciated should be = original cost – residual value, (same as in the straight line method) right? It’s just that I couldn’t find in any of the examples a residual amount with the reducing balance method and I don’t want to take it for granted.
No – with reducing balance, the residual value is irrelevant for the depreciation calculation. It is only relevant when doing straight-line depreciation.
Thank you John for clarifying it.
You are welcome 馃檪
Excuse me sir, i still dont understand how 10%*(cost / 20.000) = 2.000. What is the value of “cost”, sir? I think the word “cost” mean the cost of the car? = 20.000, or i get it wrong somewhere?
Looking forward to hearing your explain. Thank you sir!
The cost is 20,000. 10% x 20,000 = 2,000.
At the first time I was confused too. But later i recognized that the cost is $20,000 not cost divided $20,000