best summary notes
Depreciation
Meaning it is allocation of capital expenditure during useful life of an asset.
Depreciable asset:
Held for use and having useful life exceeds one year and having limited life only. Land has unlimited life hence it is a non depreciable asset.
Causes/reasons for deprecation
Normal wear tear(use)
Efflux of time
Change in technology
use of mines.
Objectives of depreciation
Correct income measurement( true profit and loss account)
True position statement (balance sheet)
Funds for replacement(sinking fund)
True cost of production
Factors affecting depreciation
Cost of asset =purchase cost and incidental expenses incurred before put to use.
Useful life – asset produces expected output.
Scrap value: realized at the end of useful life.
Methods of depreciation:
Straight line method
Written down value method
Sum of years of digit method
Annuity method
Sinking fund method
Machine hour method
Depletion method
Straight line method:
Under this depreciation is similar in each year.
Depreciation = cost of asset-scrap value/useful life
Rate of depreciation= straight line depreciation*100/cost of asset
This method is used for trademark, patent and copyright etc. having equal utility during useful life.
Benefits :
Easy to calculate
Easy to understand.
At the end of useful life value will be nearest to scrap value.
In account deprecation is provided as per day or month of utilization.
In income tax depreciation is provided as per 180 days.
If asset is used more than 180 days full depreciation is provided
If asset is half used up to 180 days depreciation is provided
Written down/reducing balance method:
Under this asset never become zero.
Only one method WDV is allowed as per income tax.
Under this method there is a balance of total expenditure charged, under this method as depreciation is decreased and repair expense is increased.
Under this method no individual identity of an asset hence separate plant register is required for showing details of each plant.
Rate of depreciation under WDV =
Journal entries:
1st method
Depreciation accont Dr.
To provision for depreciation account
Profit and loss account Dr.
To depreciation account
Second alternative:
Depreciation account Dr.
To asset account
Profit and loss account Dr.
To depreciation account
Sum of year of digit method:
It is a modification of reducing balance method:
depreciation = (c-s)*number of years of remaining useful life including current year/total of all digits of the life of the asset
Depreciable amount = Cost of asset-scrap value
C 1,00,000 S 10,000 useful life – 3 years
Find depreciation of 1st, 2nd, and 3rd year
Depreciable amount =
1,00,000-10,000=90,000
Sum of digit of life = 1+2+3=6
1st year 90,000*3/6=45,000
2nd year 90,000*2/6=30,000
3rd year 90,000*1/6=15,000
C 60,000 S 5,000 useful life – 5 years
Annuity method
It is only one method which provides interest on capital.
Under this method before charging depreciation, interest on opening balance of an asset will be provided.
Depreciation = cost of an asset*annuity rate given in question
This method generally used for lease.
SINKING FUND METHOD:
It is the only one method in which fund for replacement of new asset is available
Under this method amount equal to depreciation will be invested. From sale of investment and interest accrued on such investment will be realized at the end of useful life. From above sale proceeds, new asset will be purchased.
Journal entries
Depreciation account dr.
To sinking fund account
Profit and loss account Dr.
To depreciation account
Investment made in first year
Sinking fund investment account Dr.
To bank account
In 2nd year onwards, 1st 2 entries will be same.
Interest is received
Bank account dr.
To interest on sinking fund investment
Interest on sinking fund inv. Dr.
To sinking fund
Sinking fund investment account Dr.
To bank account
(amount of depreciation + interest income)
In last year: no investment is possible
1st 2 entries will be same.
Investments are sold
Bank account Dr.
To sinking fund investment
If profit
Sinking fund investment dr.
To sinking fund
If loss
Sinking fund account Dr.
To sinking fund investment
To close the account of asset
Sinking fund account Dr.
To asset account
To close sinking fund account
If credit balance
Sinking fund account dr.
To general reserve
If debit balance
Profit and loss account dr.
To sinking fund account
Example
C 1,00,000 S 10,000
N 3 years
Interest rate 10%
investment sold at the end of 3rd year at rs. 65,000. Pass journal entries and prepare asset, sinking fund and sinking fund investment account
Depreciation = c-s/n
=1,00,000-10,000/3
=30,000
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Investment made in first year
Sinking fund inv. account Dr. 30,000
To bank account 30,000
In 2nd year onwards,
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Interest is received
Bank account dr. 3,000
To interest on sinking fund investment 3,000
Interest on sinking fund inv. Dr. 3,000
To sinking fund 3,000
Sinking fund inv. account Dr. 33,000
To bank account 33,000
(amount of depreciation + interest income)
In last year:
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Interest is received
Bank account dr. 6,300
To interest on sinking fund investment 6,300
Interest on sinking fund inv. Dr . 6,300
To sinking fund 6,300
Investments are sold
Bank account Dr. 65,000
To sinking fund investment 65,000
If profit
Sinking fund investment dr. 2,000
To sinking fund 2,000
Cost =30,000+33,000=63,000
Profit 65,000-63,000= 2,000
Sinking fund account Dr. 1,00,000
To asset account 1,00,000
(Assume that nothing realized from dispose of asset)
Balance of sinking fund
30,000+33,000+ 6,300+30,000=99,300
To close sinking fund account
If credit balance
Sinking fund account dr. 1,300
To general reserve 1,300
Question 2
Cost 1,25,000, scrap value 5,000
N 4 years, interest on SFI 10%
Scrap value realized 4,000
Investment at end of 4th year sold at Rs.1,18,000
Pass journal entries and prepare SF, SFI, and assets account
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Investment made in first year
Sinking fund inv. account Dr. 30,000
To bank account 30,000
In 2nd year onwards,
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Interest is received
Bank account dr. 3,000
To interest on sinking fund investment 3,000
Interest on SFI Dr. 3,000
To sinking fund 3,000
Sinking fund inv. Dr.33,000
To bank account 33,000
(amount of depreciation + interest income)
3RD YEAR
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Interest is received
Bank account dr. 6,300
To interest on sinking fund investment 6,300
Interest on SFI Dr. 6,300
To sinking fund 6,300
Sinking fund inv. Dr. 36,300
To bank account 36,300
(amount of depreciation + interest income)
In last year:
Depreciation account dr. 30,000
To sinking fund account 30,000
Profit and loss account Dr. 30,000
To depreciation account 30,000
Interest is received
Bank account dr. 9,930
To interest on sinking fund investment 9,930
Interest on SF inv. Dr. 9,930
To sinking fund 9,930
Investments are sold
Bank account Dr. 1,18,000
To sinking fund investment 1,18,000
If profit
Sinking fund investment dr. 18,700
To sinking fund 18,700
Cost =30,000+33,000+36300=99,300
Profit 65,000-63,000= 2,000
Bank account dr. 4,000
To asset account 4,00
Sinking fund account Dr. 1,21,000
To asset account 1,21,000
(Assume that nothing realized from dispose of asset)
Balance of sinking fund
30,000+33,000+ 6,300+30,000+9930=1,09,230To close sinking fund account
If credit balance
Sinking fund account dr. 36,930
To general reserve 3 6.930
1,09,230+18700-1,51,000=36,930
Q .5 C 100000
R 10 % WDV
At beginning of 2nd year new asset is purchased 50,000.
At beginning of 3rd year 1st asset is sold 50,000.
At the end of 4 th year asset is sold at Rs.15,000
Prepare machine, machine disposal account, provision of depreciation account.
Machinery account
| particulars | Rs. | particulars | Rs. |
| To bank | 100000 | By bal. | 100000 |
| 100000 | 100000 | ||
| To bal | 100000 | ||
| To bank | 50000 | By bal. | 150000 |
| 150000 | 150000 | ||
| To bal | 150000 | By MD A/C | 100000 |
| By bal. | 50000 | ||
| 150000 | 150000 | ||
| To bal | 50000 | By MD A/C | 50000 |
| 50000 | 50000 |
PROVISION FOR DEPRECIATION A/C
| particulars | Rs. | particulars | Rs. |
| To bal | 10000 | BY Dep | 10000 |
| 10000 | 10000 | ||
| By bal | 10000 | ||
| To bal | 24000 | By dep | 14000 |
| 24000 | 24000 | ||
| TO MD A/C | 19000 | By bal | 24000 |
| To bal | 9500 | By dep | 4500 |
| 28500 | 28500 | ||
| By bal | 9500 | ||
| To MD A/C | 13550 | By dep | 4050 |
| 13550 | 13550 |
MACHINE DISPOSAL ACCOUNT
| particulars | Rs. | particulars | Rs. |
| 3rd year | By PFD | 19000 | |
| To machine | 100000 | By bank | 50000 |
| By p&l | 31000 | ||
| 100000 | 100000 | ||
| 4th year | By PFD | 13550 | |
| To machine | 50000 | By bank | 15000 |
| By p&l | 21450 | ||
| 50000 | 50000 | ||
Sale or disposal of an asset
rate of dep 10% wdv
1.7.2005 C 4,00,000,
1.10.2006 Purchase at Rs. 4,80,000
1.4.07 1st sold at Rs 198000
1.7.8 2nd machine sold at Rs. 345000
Prepare machinery account
Machinery account
| particulars | Rs. | particulars | Rs. |
| 1.7.5 To bank | 400000 | By dep | 30000 |
| By bal | 370000 | ||
| 400000 | 400000 | ||
| 1.4.6 To bal | 370000 | By dep 37000+24000 | 61000 |
| 1.10.6 Tobank | 480000 | By bal | 789000 |
| 850000 | 850000 | ||
| 1.4.7 to bal | 789000 | By bank | 198000 |
| By p & l | 135000 | ||
| By dep | 45600 | ||
| By bal | 410400 | ||
| 789000 | 789000 | ||
| 1.4.8 to bal | 410400 | By dep 3m | 10260 |
| By bank | 345000 | ||
| By P & l | 55140 | ||
| 410400 | 410400 |
Machine 1 1.7.05 400000
9m 30000
1.4.6 370000
Less 12 m 37000
1.4.7 333000
Less sale value 198000
135000
Machine 2
1.10.06 480000
Less dep 6m 24000
1.4.07 456000
12month 45600
1.4.8 410400
3m 10260
1.7.8 400140
Sale value 345000
55140
1 Difference between sale and agreement to sale 4m
2 Difference between general and special property 2m
3 Difference between condition and
Warranty 4m
4 Implied conditions and warranty only points no details. 4m
5 Define goods 3m
6 Contract of labour 2m
C 500000, s 50000, n 4 year, sold at the end of useful life 53000, R 10% slm. Prepare provision for dep and machinery. 6m
7 C 100000, s10000, n 3 years, R 10% interest, at the end of 3rd year investment are sold at Rs. 65000.
Prepare sinking fund, sinking fund investment account 8m
8 A sold goods to B for rs. 25000 on return basis. B accepts 12000 and reject 8000 in current year.
In next year accept 2000 and reject 3000 5m