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Depreciation Example 4 – ACCA Financial Accounting (FA) lectures

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  1. Quick one :

    In practical situation we don’t know scrap value I advance.
    Suppose the entire assets is completely deprectiated but we are still using it but in books it’s £0 value (cost less acc dep).
    However at later stage in year 8 we scrap it or sell it for £200 , how will this be shown please?

    Thank you.

  2. how is example 5 double entry? we carry forward the old cost of fixed asset and accumulated depreciation to the new cost of fixed asset?
    2003-6-30
    Debit credit
    expense-depreciation36000
    accumulated depreciation36000
    fixed asset cost 3072000
    fixed asset cost 3600000
    accumulated depreciation1080000+36000
    revaluation reserve 588000
    2003-12-31
    Debit credit
    expense-depreciation36000
    accumulated depreciation44521.74
    revaluation reserve 8521.74
    retain earning588000-8521.74
    revaluation reserve 588000-8521.74
    Please check it for me and correct me. Thank you teacher!

  3. I noticed there isn’t a lecture for Example 5 on Depreciation: Purpurs has a year end of 31 December each year.
    In his Statement of Financial Position as at 31 December 2002 he has buildings at a cost of
    $3,600,000 and accumulated depreciation of $1,080,000.
    His depreciation policy is to charge 2% straight line.
    On 30 June 2003, the building is to be revalued at $3,072,000. There is no change in the remaining
    estimated useful life of the building.
    Show the relevant ledger accounts for the year to 31 December 2003.

    Can you explain how they worked out the total year as 50 and why did they use a rate of $72,000?
    In the answers it had the following:
    With depreciation at 2% p.a., expected life of building was 50 years.
    At date of revaluation, the accumulated depreciation is $1,116,000. At the rate of $72,000 p.a..
    this is
    1,116,000/72,000= 15.5 years
    So expected life remaining = 50 – 15.5 = 34.5 years.

    How did we know it was 50? And how did we get a rate of $72,000?

    • 2% straight line depreciation is the same as depreciating over 50 years (100%/2% = 50).

      Depreciating a cost of 3,600,000 over 50 years (or at 2% per year) is a depreciation expense of 2% x 3,600,000 = 72,000 p.a.

  4. Hello,

    thank you very much for the great lectures! I understand everything do far apart from one thing. At 11 min of this video you said that we credit disposal account with 800 to clear the balance and debit SOPL with 800. The remaining 800 in the disposal account is on the credit side so shouldn’t we debit the disposal account?

  5. Hi John,

    For example 4, what entries would the book keeper make to record the sale of the car before the accountant gets involved?

    Presumably they would debit cash, but would we expect the book keeper to be aware that they are dealing with the sale of a non-current asset and therefore credit a disposals account?

    • The would debit cash. They would then either ask the accountant and do the correct entries, or they would credit a suspense account and let the accountant sort it out later. (I explain suspense accounts in a later lecture).

  6. Hi John,

    Thank you for this lecture, I understand everything in the video apart from minute 5.45 where the depn expense is sent to the P/L. The double entry for AD is cr AD (SFP) and dr depn exp (PL). How can we send the 700 to the PL if it’s already posted there.

    Thank You!

    • But it hasn’t been posted there. At the end of the year we credit the depreciation expense account and debit the p&L account, in exactly the same way as I dealt with the expenses in the lectures working through Chapter 3 of our lecture notes. (Have you watched the earlier lectures?)

  9. Hi,

    I have seen accountants doing other way around also. Means they don’t show loss at all but take entire £1500 as depreciation in the final year resulting the balance nil . Is this acceptable in accounting standards n policy? I know there will be no impact on P&L and the result will be same.

    Thanks.

    • Nothing will appear on the SOFP because the car has been sold (and there are zero balances on both the car account and on the accumulated depreciation account).
      On the SOPL will appear the depreciation expense of 700 and also the loss on sale of 800.

  14. 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?

  16. 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)

  18. 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) 🙂

  20. 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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