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Depreciation Example 4 – ACCA Financial Accounting (FA) lectures

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  1. Hi question

    During the year a machine was sold for 80,000, which is included in revenue. The machine had a cost of 200,000 with accumulated depreciation of 110,000 at the date of disposal.
    The company’s depreciation policy is as follows:
    Buildings 1% straight line
    Plant and machine 30% reducing balance

    Full depreciation is charged in the year of purchase and none in the year of disposal. Land costing 500,000 is not depreciated. Depreciation expense is to be included in COS.

    In the trial balance Land and Building cost 5,500,000 accumulated depreciation 1,000,000 and for Plant and Machinery cost 2,500,000 and accumulated depreciation 450,000

    what are the entries for this?

  3. Quite some deep lecture….

    I have a few questions gathered up after absorbing so much.

    1) Is the purpose of depreciating the non current asset, and getting rid of it bit by bit in the expense section of the SOPL, in order to indirectly recover the capital the owner spent to acquire them? Once, the value of the Non Current Asset has become zero via the help of the day to day Income generated from the Business, the Owner can tell the people they have recovered the capital put into the Business or into the Machines of the Factory, or the Car as in the example of the Lecture.

    Also, if our non current assets got destroyed for example in a natural disaster, or got taken away from us on any other unfortunate circumstance, we would not financially mourn the loss (except for Land).

    Please share your valuable input back. Am I on the right track ? If not, correct my view elaborately.

    2) Why do we need to create a Disposal Account ? Could we not have just shifted all that we added on the credit side of this Disposal account, towards the Car ? account itself ? One less T Account to deal with.

    3) Would Accumulated Depreciation Account come under Liability section within the Accounting Equation ?

    4) Where would Disposal Account show up within the Accounting equation ?

    Thankyou.

    • 1. Buying an asset is a cost of running the business. Rather than charge all the cost as an expense in one year, we spread the expense so as to match it will the revenue generated.

      2. We need to calculate the profit or loss on sale (but appreciate that you are not asked to write up t-accounts in the exam).

      3. No – it reduces the assets

      4. I doesn’t because the balance on the disposal account is the profit or loss on sale and will be part of the profit for the year.

      • 1. Capital Expenditure you mean ? So once we have recovered from the cost of an Asset after 10years of deducting the cost using depreciation (eg buying new machinery for the Factory), the Factory shall start earning more profits, and the cost of their product shall reduce due to the cost of the overhead vanishing ?

        2. Ok

        3. So does it come under the equation ? If so, where is it placed ?

        4. So Disposal Account would come under Capital within the Equation.

        Asset = Liability + Capital
        Asset= Liability = (Open.Capital + Profit (=Income-Expense) – Drawings)

  5. Dear sir if we calculate depreciation by straight line method ……..if write calculate dep.. on cost .than we can ignore residual value. and apply cost*%age…..what about residual value and useful life ……..

    • As I explain at the end of this lecture, revaluations are dealt with later when we come to Limited Companies, because it is limited companies for whom it is relevant.

      (There is, of course, a printed answer to example 5 in the lecture notes, but it is only when we come to limited companies that it becomes relevant.)

      • Thanks, I did notice you mentioning that revaluations are dealt with later when we come to Limited Companies but as the example is there, I was just wondering!

      • Check again after you have watched the lectures on limited companies, because I do cover it (but it doesn’t really make sense to cover it until having dealt with limited companies) 🙂

  7. Could you explain, is there any reason for writing the balance in the opposite side then drawing it back? isn’t it easier just write the outstanding amount where it is ? For example, Dr=5500, Credit=5000, then Balance is Debit 500

    • It is the standard way of balancing accounts – I go through this (and explain the reason why) in the earlier lectures on double entry book-keeping.

      As far as the exam is concerned, you cannot be asked to actually write-up t-accounts, but you may get given t-accounts already written and they will always be balanced off in this way.

      • Quite some deep lecture….

        I have a few questions gathered up after absorbing so much.

        1) Is the purpose of depreciating the non current asset, and getting rid of it bit by bit in the expense section of the SOPL, in order to indirectly recover the capital the owner spent to acquire them? Once, the value of the Non Current Asset has become zero via the help of the day to day Income generated from the Business, the Owner can tell the people they have recovered the capital put into the Business or into the Machines of the Factory, or the Car as in the example of the Lecture.

        Also, if our non current assets got destroyed for example in a natural disaster, or got taken away from us on any other unfortunate circumstance, we would not financially mourn the loss (except for Land).

        Please share your valuable input back. Am I on the right track ? If not, correct my view elaborately.

        2) Why do we need to create a Disposal Account ? Could we not have just shifted all that we added on the credit side of this Disposal account, towards the Car ? account itself ? One less T Account to deal with.

        3) Would Accumulated Depreciation Account come under Liability section within the Accounting Equation ?

        4) Where would Disposal Account show up within the Accounting equation ?

        Thankyou.

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