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Revision- Depreciation

Revision- Depreciation. Lesson Objectives. £ To be able to explain the two methods of depreciation ££ To be able to identify why a provision for depreciation is required £££ To be able to record the sale of an asset. Starter Activity. What is a doubtful debt?

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Revision- Depreciation

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  1. Revision- Depreciation

  2. Lesson Objectives £ To be able to explain the two methods of depreciation ££ To be able to identify why a provision for depreciation is required £££ To be able to record the sale of an asset

  3. Starter Activity • What is a doubtful debt? • A debtor that cannot pay the business • What is a bad debt recovered? • When a business has written off a debt, but the debtor pays up. • Why may a debtor pay up if debt has been written off? • Debtor wants to trade with them in the future, does not want a bad reputation • Why does a business account for depreciation? • To provide a realistic cost of an asset • What is the difference between straight-line and reducing-balance methods of depreciation? • Straight= Same amount is removed from the asset each year Reducing= Amount of depreciation changes each year • What is the difference between capital and revenue expenditure? • Capital= Money spent on fixed assets, intended for future use Revenue= Money spent on running costs, not intended to be kept for the long term

  4. Straight-line Easy to calculate Even depreciation charge each year Asset will be considered worthless in the end Reducing-balance Complex to calculate More realistic compared to S/L % is always taken from the value of the asset Depreciation

  5. Recording Depreciation • A provision for depreciation is created in the general ledger, this will contain all of the charges for depreciation over the financial period. • At the end of the period the total is recorded: • Dr – Profit and loss account (expense) • Cr – Provision for depreciation account (liability) • Depreciation accumulates in the provision for depreciation account until the asset is sold or scrapped

  6. Recording The Sale Of A Fixed Asset • Eliminate the original cost of fixed asset from the ledger • Eliminate the accumulated depreciation on that fixed asset • Record the amount received for fixed asset • Was a profit or loss made on the asset? • A fixed asset disposal account will have to be created, this account shows the profit or loss made on the item when closed. • Profit or loss is then transferred to P&L as a gain or a loss

  7. Murray Traders • Murray traders purchased office equipment on 1st Jan 2005 for £12,000. The equipment was depreciated by 25% using the straight line method on the 31st Dec 2005 and 2006. • On 17th May 2007 the equipment was sold for £2,300 • Record the disposal of the fixed asset in the businesses ledger

  8. Use the following ledgers Office Equipment at Cost Provision for Depreciation Account Jan 1 05 Bank 12,000 Dec 31 05 P&L 3,000 Dec 31 06 Bal c/d 6,000 Dec 31 06 P&L 3,000 6,000 6,000 Jan 1 07 Bal b/d 6,000 Record the original cost of the equipment Record the depreciation for the two years 2005 and 2006 Balance the provision for depreciation account

  9. Need Some Help? • Prepare an “Office Equipment Disposal Account” • Transfer the cost of the office equipment to the disposal account (mirror move) • Transfer the accumulated depreciation charge to the disposal account (mirror move) • Record the receipt of the cheque in the disposal account (income) • Balance the disposal account. Balance will show a Profit (DR balancing figure) or Loss (CR balancing figure), this is transferred to the Profit & Loss account. • Murray traders make a loss on the sale of the asset = CR entry.

  10. Office Equipment Disposal Account May 17 Disposal 12,000 May 17 Depreciation 6,000 May 17 Bank 2,300 May 17 P&L (loss) 3,700 12,000 12,000

  11. Quick recap- Errors not revealed by a trial balance. Name them… • Commission • Reversal • Omission • Principle • Original entry • Compensating Explain each with an example

  12. CROPOC • Commission- Correct amount entered into correct side of wrong account • Reversal of entry- Correct amounts entered into the wrong sides of account • Omission- Transaction missed from ledgers • Principle- Transaction is posted to incorrect class of account, but on correct side • Original entry- Amount is entered wrong • Compensating errors- Errors made on both side that equal the same

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