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To spread the benefit of the grant over the estimated useful life of the asset. By crediting the grant to the asset account, this reduces the base upon which depreciation is calculated.
Thus the annual depreciation figure is reduced and, as a result, the profit for the year is not charged with as great an expense as otherwise.
In this way the results for the company are seen to benefit annually as a result of the grant being spread over the appropriate period of time
So the grant stays as deferred income in PL and deferred liability in Sofp and reduced every year by depreciation special for the grant? Right?
What’s the another way? If any..
What you have just written IS the other way!
Method 1 is credit the amount of the grant to the asset account
Dr Cash
Cr AssetMethod 2 is leave the grant in a deferred income account. So charge depreciation on the cost price of the asset as shown in the asset account and calculate each year the amount of the grant to be matched against the depreciation
If the asset is being depreciated at 20% straight line, then each year you’ll credit 1/5 of the grant to the statement of profit or loss
Dr Cash
Cr Deferred Incomeand then, each year:
Dr Deferred Income
Cr (probably) Cost of Sales
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