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1 DEPRECIATION. 2 CONCEPT AND DEFINITION OF DEPRECIATION CAUSES OF DEPRECIATION.

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Presentation on theme: "1 DEPRECIATION. 2 CONCEPT AND DEFINITION OF DEPRECIATION CAUSES OF DEPRECIATION."— Presentation transcript:

1 1 DEPRECIATION

2 2 CONCEPT AND DEFINITION OF DEPRECIATION CAUSES OF DEPRECIATION

3 3 LEARNING OUTCOMES: understand the concept and definition of depreciation. relate depreciation to National Education. understand and explain the causes of depreciation. At the end of the lesson, students should be able to:

4 4 FIXED ASSETS Assets acquired not for resale. Examples : - A printing machine in a printing company. - A van in a courier service company. Help to earn revenue for more than 1 financial year.

5 5 The portion of the cost allocated to a particular accounting period is charged as an expense against revenue (Matching principle). DEFINITION OF DEPRECIATION Applies only to fixed assets. The whole cost of the fixed assets must be spread over its useful life. This portion of the cost is called Depreciation.

6 6 CAUSES OF DEPRECIATION  Physical Deterioration  Obsolescence  Depletion of an asset  Passage of Time

7 7 Caused by physical wear and tear - rust, erosion, rot and decay Examples - office furniture - printing machines PHYSICAL DETERIORATION

8 8 Fixed assets become out-of-date - when new model or more efficient tool come into existence. Examples - cars - computers OBSOLESCENCE Pentium I Pentium IV

9 9 Examples - Gold mines - Quarries - Little Guilin is a depleted granite quarry now turned into a beautiful lake. DEPLETION OF FIXED ASSETS An asset that depletes over time as resources are extracted from it. Little Guilin

10 10 Some assets confer upon their holders the exclusive rights to enjoy certain privileges for a fixed period of time. PASSAGE OF TIME Examples - copyrights - patent rights - leases on land

11 11 NATIONAL EDUCATION 10-year depreciation policy on all vehicles including buses in Singapore. Very high depreciation. Buses are in good condition and comfortable. Majority of people move around by bus. Few breakdowns, less traffic jam and air pollution. An excellent public transport. No one owes us a living We must appreciate it and work hard for the nation.

12 12 HOMEWORK GCE ‘O’ Level Principles of Accounts Nov 2000 Q2(b).

13 13 STRAIGHT LINE METHOD OF DEPRECIATION

14 14 At the end of the lesson, students should be able to: LEARNING OUTCOMES: record depreciation in the books using the Provision for Depreciation method. calculate depreciation using Straight Line method. understand the advantages and disadvantages of Straight Line Depreciation method. understand the features of Straight Line Depreciation method.

15 15 Revaluation METHODS OF DEPRECIATION Straight-Line Reducing Balance

16 16 A fixed asset is depreciated by an equal amount per year. STRAIGHT LINE METHOD Example: If an asset is depreciated by $1,000 in the first full year of usage, it will also be depreciated by $1,000 in the second year; $1,000 in the third year and this continues annually until it is fully depreciated.

17 17 Advantages STRAIGHT LINE METHOD Disadvantage - Easy to understand. - Easy to calculate. - Assumes fixed asset gives same amount of service annually throughout its useful life.

18 18 A machine X costs $20,000 is expected to last 4 years. At the end of the 4th year, it can be sold for $2,000 as scrap. Original cost - Residual value Expected useful life Depreciation per year = = $4,500 STRAIGHT LINE METHOD (I) = 20,000- 2000 4 ( Scrap value is the same as residual value.)

19 19 A printing machine costs $17,000 is expected to last 5 years. At the end of the 5th year, it can be sold for $2,000 as scrap. Original cost - Residual value Expected useful life STRAIGHT LINE METHOD (I) Depreciation per year = = $3,000 = 17,000 - 2,000 5

20 20 An office equipment costs $5,000 is expected to depreciate by 20% per annum. = 20 100 = $1,000. STRAIGHT LINE METHOD (II) X 5,000 Rate of depreciation x Original cost Depreciation per year =

21 21 An office equipment costs $25,000 is expected to depreciate by 10% per annum.. = $2,500 STRAIGHT LINE METHOD (II) Depreciation per year = = 10 100 Rate of depreciation x original cost X 25,000

22 22 CALCULATION OF RATE OF DEPRECIATION: Rate of depreciation = = 500 = 10% Depreciation of machine X = $500. Original cost of machine X = $5,000. X 100 5,000 Depreciation x 100% Original cost

23 23 STRAIGHT LINE METHOD Mach. Cost Scrap value Useful life Annual dep. Rate of dep. X $5,000 Nil 10 years Y $10,000 $1,000 5 years Z $8,000 Nil 5 years $500 $1,800 $1,600 10% 18% 20%

24 24 STRAIGHT LINE METHOD Mach. Cost Scrap value Useful life Annual dep. Rate of dep. X $1,500 Nil 5 years Y $5,000 $500 10 years Z $10,000 $1,000 18 years $300 20% $450 9% $500 5%

25 25 STRAIGHT LINE METHOD Mach. Cost Scrap value Useful life Annual dep. Rate of dep. X $10,000 $1,000 10 years $400 5 years $200 $900 9% 4 years 25% Nil 20% Y $1,600 Nil Z $1,000 y z Next table

26 26 MACHINE Y Depreciation = Original cost - scrap value Useful life 400 = 1,600 - 0 Useful life Useful life = 1,600 400 = 4 years Original cost = $1,600 Scrap value = nil Depreciation = $400

27 27 MACHINE Z Depreciation = Original cost - scrap value Useful life 200 = 1,000 - scrap value 5 1,000 = 1,000 - scrap value Scrap value = 0 Original cost = $1,000 Useful life = 5 years Depreciation = $200

28 28 STRAIGHT LINE METHOD Mach. Cost Scrap value Useful life Annual dep. Rate of dep. A $2,000 Nil $250 9 years 20% B $5,000 $500 10% C Nil 5 years $800 A B 8 years12.5% $500 $4,000 C Record depreciation

29 29 MACHINE A Depreciation = Original cost - scrap value Useful life 250 = 2,000 - 0 Useful life Useful life = 2,000 250 = 8 years Original cost = $2,000 Scrap value = nil Depreciation = $250

30 30 MACHINE B Depreciation = Rate of depreciation x Original cost 500 = 5,000 - 500 Useful life Useful life = 4,500 500 = 9 years Original cost = $5,000 Scrap value = $500 Rate of Depreciation = 10% = 10 x 5,000 100 = $500 Depreciation = Original cost - scrap value Useful life

31 31 MACHINE C Depreciation = Original cost - scrap value Useful life 800 = Original cost - 0 5 Original cost = 800 x 5 = $4,000 Useful life = 5 years Scrap value = nil Depreciation = $800

32 32 Example: An office equipment was bought for $16,000 on 1 Jan 1999. It is expected to have a useful life of 8 years with zero residual value. Using straight line depreciation method, show the records on your books for 2 years. RECORDING DEPRECIATION IN THE BOOKS - Provision for depreciation method

33 33 Office equipment 1999 Jan 1 Bank $16,000 1999 Dec 31 Bal. c/d $16,000 2000 Jan 1 Bal. b/d $16,000 2000 Dec 31 Bal.c/d $16,000 2001 Jan 1 Bal. b/d $16,000 B/S

34 34 Depreciation - office equipment 1999 Dec 31 Prov. for dep. $2,000 Provision for depreciation - office equipment 1999 Dec 31 Bal. c/d $2,000 1999 Dec 31 P&L a/c $2,000 1999 Dec 31 Depreciation $2,000 2000 Dec 31 Prov.for dep. $2,000 2000 Dec 31 P&L a/c $2,000 2000 Jan 1 Bal. b/d $2,000 2000 Dec 31 Bal. c/d $4,000 2001 Jan 1 Bal. b/d $4,000 Dec31 Depreciation 2,000 B/S P&L $4,000

35 35 P & L a/c for year ended 31 Dec 1999 1999 Dec 31 Depreciation $2,000 P & L a/c for year ended 31 Dec 2000 2000 Dec 31 Depreciation $2,000 Dep

36 36 Balance Sheet as at 31 Dec 1999 Fixed asset Office equipment $16,000 Balance Sheet as at 31 Dec 2000 Fixed asset Office equipment $16,000 Less Prov. for dep. 2,000 $14,000 Less Prov. For dep. 4,000 $12,000 Dep O/E

37 37 Provision for Depreciation account shows accumulated depreciation of fixed asset. IMPORTANT FEATURES: Fixed asset account shows original cost of asset. Net book value of fixed asset (in Balance Sheet) is original cost less Provision for Depreciation.

38 38 HOMEWORK Textbook Betsy Li p319 Q7. GCE ‘O’ Level Principles of Accounts November 1998 Section B Q7.

39 39 REDUCING (OR DIMINISHING) BALANCE METHOD OF DEPRECIATION

40 40 At the end of the lesson, students should be able to: LEARNING OUTCOMES: record depreciation in the books using the Provision for Depreciation method. calculate depreciation using Reducing Balance method. understand the advantages and disadvantages of Reducing Balance Depreciation method. understand the features of Reducing Balance Depreciation method.

41 41 REDUCING BALANCE METHOD The amount of depreciation per year diminishes with every successive year. Example: - If an asset is depreciated by $2,000 in the first full year of usage, it will be depreciated by less than $2,000 (eg $1,600) in the second year; and even less (eg $1,300) in the third year. This continues until it is fully depreciated.

42 42 Advantage REDUCING BALANCE METHOD Disadvantages - Overall expenses ( including repairs and maintenance) charged for the use of a fixed asset would be fairly constant. - Assets are always left with a small value at the end of useful life. - Difficult to calculate.

43 43 REDUCING BALANCE METHOD Depreciation per year = Rate of depreciationX Net book value at beginning of accounting period Net book value = Original cost - Accumulated depreciation Accumulated depreciation is the sum of the yearly depreciation.

44 44 A machine Y costs $10,000 is depreciated at 20% per annum on the reducing balance method. Show depreciation for the first 3 years. Net Book Value Depreciation Year 1 Year 2 Year 3 20 100 X 10,000 20 100 X 8,000 20 100 X 6,400 = $2,000 $10,000-2,000=$8,000 = $1,600$10,000-3,600= $6,400 = $1,280 $10,000-4,880=$5,120 REDUCING BALANCE METHOD

45 45 REDUCING BALANCE METHOD An office equipment costs $15,000 is depreciated at 10% per annum on the reducing balance method. Show depreciation for the first 3 years. Depreciation Net Book Value Year 1 Year 2 Year 3 10 100 X 15,000= $1,500 $13,500 10 100 X 13,500 = $1,350 $12,150 10 100 X 12,150 = $1,215 $10,935

46 46 REDUCING BALANCE METHOD Complete the missing items in the table: MachCost Date of purchase Annual depreciation for the year ended 31 Dec 2000 Rate of depreciation X $5,000 1.1.2000 10% Y$10,000 1.1.1999 15% Z $12,000 1.1.1998 10% $500 $1,275 $972 y zNEXT TABLE

47 47 REDUCING BALANCE METHOD Machine Y Cost = $10,000 Date of purchase = 1.1.1999 Rate of depreciation = 15% DepreciationNet Book ValueYr ended 31.12.1999 15 100 X 10,000$10,000-1,500=$8,500 31.12.2000 15 100 X 8,500$10,000-2,775= $7,225 = $1,500 = $ 1,275

48 48 REDUCING BALANCE METHOD Machine Z Cost = $12,000 Date of purchase = 1.1.1998 Rate of depreciation = 10% DepreciationNet Book ValueYr ended 31.12.1998 10 100 X 12,000$12,000-1,200=$10,800 31.12.1999 10 100 X 10,800$12,000-2,280=$9,720 31.12.2000 10 100 X 9,720 $12,000-3,252=$8,748 = $1,200 = $ 1,080 = $972

49 49 REDUCING BALANCE METHOD Complete the missing items in the table: MachCost Date of purchase Annual depreciation for the year ended 31 Dec 2000 Rate of depreciation X $6,000 1.1.1999 15% Y$8,000 1.1.1998 20% Z $15,000 1.1.1997 10% $765 $1,024 $1093.50 Recording depreciation X Y Z

50 50 REDUCING BALANCE METHOD Machine X Cost = $6,000 Date of purchase = 1.1.1999 Rate of depreciation = 15% DepreciationNet Book ValueYr ended 31.12.1999 15 100 X 6,000$6,000-900=$5,100 31.12.2000 15 100 X 5,100$6,000-1,665= $4,335 = $900 = $765

51 51 REDUCING BALANCE METHOD Machine Y Cost = $8,000 Date of purchase = 1.1.1998 Rate of depreciation = 20% DepreciationNet Book Value Yr ended 31.12.1998 20 100 X 8,000$8,000-1,600=$6,400 31.12.1999 20 100 X 6,400$8,000-2,880=$5,120 31.12.2000 20 100 X 5,120 $8,000-3,904=$4,096 = $1,600 = $ 1,280 = $1,024

52 52 REDUCING BALANCE METHOD Machine Z Cost = $15,000 Date of purchase = 1.1.1997 Rate of depreciation = 10% Yr ended Depreciation Net Book Value 31.12.1998 10 100 X 13,500$15,000 - 2,850 = $12,150 31.12.1999 10 100 X 12,150$15,000 - 4,065 = $10,935 31.12.2000 10 100 X 10,935$15,000 -5,158.50=$9,841.50 = $1,350 = $ 1,215 = $1,093.50 31.12.1997 10 100 X 15,000= $1,500 $15,000 - 1,500 = $13,500

53 53 Example: An office equipment was bought for $10,000 on 1 Jan 1999. It is depreciated at 10% per annum on the reducing balance method. Show the records on your books for 2 years. RECORDING DEPRECIATION IN THE BOOKS - Provision for depreciation method

54 54 REDUCING BALANCE METHOD Depreciation (10%) Net Book Value 31.12.1999 31.12.2000 A machine costs $10,000 is depreciated at 10% per annum on the reducing balance method. 10 x 10,000 = $1,000 100 10 x 9,000 = $900 100 $10,000 -1,000=$9,000 $10,000 -1,900 = $8,100

55 55 Office equipment 1999 Jan 1 Bank $10,000 1999 Dec 31 Bal. c/d $10,000 2000 Jan 1 Bal. b/d $10,000 2000 Dec 31 Bal.c/d $10,000 2001 Jan 1 Bal. b/d $10,000 B/S

56 56 Depreciation - office equipment 1999 Dec 31 Prov. for dep. $1,000 Provision for depreciation - office equipment 1999 Dec 31 Bal. c/d $1,000 1999 Dec 31 P&L a/c $1,000 1999 Dec 31 Depreciation $1,000 2000 Dec 31 Prov.for dep. $900 2000 Dec 31 P&L a/c $900 2000 Jan 1 Bal. b/d $1,000 2000 Dec 31 Bal. c/d $1,900 2001 Jan 1 Bal. b/d $1,900 Dec31 Depreciation 900 B/S P&L $1,900

57 57 P & L a/c for year ended 31 Dec 1999 1999 Dec 31 Depreciation $1,000 P & L a/c for year ended 31 Dec 2000 2000 Dec 31 Depreciation $900 Dep

58 58 Balance Sheet as at 31 Dec 1999 Fixed asset Office equipment $10,000 Balance Sheet as at 31 Dec 2000 Fixed asset Office equipment $10,000 Less Prov. for dep. 1,000 $9,000 Less Prov. For dep. 1,900 $8,100 Dep O/E

59 59 Provision for Depreciation account shows accumulated depreciation of fixed asset. IMPORTANT FEATURES: Fixed asset account shows original cost of asset. Book value of fixed asset (in Balance Sheet) is original cost less Provision for Depreciation.

60 60 HOMEWORK Textbook Betsy Li - p318 Q4 - p320 Q9

61 61 REVALUATION METHOD OF DEPRECIATION

62 62 At the end of the lesson, students should be able to: LEARNING OUTCOMES: record depreciation in the books using the Provision for Depreciation method. calculate depreciation using Revaluation method. understand the advantages and disadvantages of Revaluation method of Depreciation. understand the features of Revaluation method of Depreciation.

63 63 The fixed asset is revalued at the end of every accounting period. REVALUATION METHOD The amount of depreciation varies every year. Depreciation is the difference between the value of the fixed asset at the beginning and end of the accounting period.

64 64 Example: - An asset can be depreciated by $1,000 in the first full year of usage, it can be depreciated by a different amount in the second year (eg $500 ); and a different amount in the third year (eg $1,200 ) depending on the valuation at the end of the accounting period and the cost or valuation at the beginning of the accounting period. REVALUATION METHOD

65 65 Advantage REVALUATION METHOD Disadvantage - Fixed asset is shown at current or realisable value. - Time consuming and costly to value the fixed asset.

66 66 Cost of printing machine on 1 Jan 2000 = $15,000. Market value on 31 Dec 2000 = $13,000. REVALUATION METHOD (I) Depreciation of printing machine for FY2000 = cost on 1 Jan 2000 = 15,000 – 13,000 = $2,000 – market value on 31 Dec 2000

67 67 Market value of printing machine on 1 Jan 2000 = $22,000. Market value on 31 Dec 2000 = $19,000. REVALUATION METHOD (I) Depreciation of printing machine for FY2000 = Market value on 1 Jan 2000 = 22,000 – 19,000 = $3,000 – Market value on 31 Dec 2000

68 68 REVALUATION METHOD (I) Complete the missing items: Mach Cost or value Market value Depreciation on 1.1.2000 on 31.12.2000 for FY2000 XYZXYZ $6,000 $4,800 $3,200 $2,500 $5,600 $4,000 $1,200 $700 $1,600

69 69 REVALUATION METHOD (I) Complete the missing items: Mach Cost or value Market value Depreciation on 1.1.2000 on 31.12.2000 for FY2000 XYZXYZ $9,000 $6,200 $6,300 $4,500 $7,500 $5,500 $2,800 $1,800 $2,000

70 70 REVALUATION METHOD (II) Depreciation expense This method is normally used for loose tools where it is difficult to estimate the rate of depreciation. The value of the asset may be inflated by new purchases and this has to be taken into account when calculating depreciation. = Value of asset at the beginning - Value of asset at the end + Any new purchases

71 71 On 1 Jan 2000 loose tools in the workshop were valued at $2,000. During the year, tools worth $1,000 were bought. On 31 Dec 2000, the estimated market value of the tools was $2,600. REVALUATION METHOD (II) Depreciation expense = Value of tools on 1 Jan 2000 = 2,000 = $400 - Value of tools on 31 Dec 2000 + New purchases - 2,600+ 1,000

72 72 On 1 Jan 2000 loose tools in the workshop were valued at $3,500. During the year, tools worth $1,500 were bought. On 31 Dec 2000, the estimated market value of the tools was $3,000. REVALUATION METHOD (II) Depreciation expense = Value of tools on 1 Jan 2000 = 3,500 = $2,000 - Value of tools on 31 Dec 2000 + New purchases - 3,000+ 1,500

73 73 RECORDING DEPRECIATION IN THE BOOKS - Provision for depreciation method Example: An office equipment was bought for $8,000 on 1 Jan 1999. It is depreciated on the revaluation method. The market values of the office equipment are shown below. Show the records on your books for 2 years. Market value as at 31.12.1999 $6,800 Market value as at 31.12.2000 $5,800

74 74 REVALUATION METHOD Yr 1 Depreciation = cost on 1.1.1999 - Market value on 31.12.1999 = $8,000 - $6,800 = $1,200 Yr 2 Depreciation = Market value on 1.1.2000 - Market value on 31.12.2000 = $6,800 - $5,800 = $1,000

75 75 Office equipment 1999 Jan 1 Bank $8,000 1999 Dec 31 Bal. c/d $8,000 2000 Jan 1 Bal. b/d $8,000 2000 Dec 31 Bal.c/d $8,000 2001 Jan 1 Bal. b/d $8,000 B/S

76 76 Depreciation - office equipment 1999 Dec 31 Prov. for dep. $1,200 Provision for depreciation - office equipment 1999 Dec 31 Bal. c/d $1,200 1999 Dec 31 P&L a/c $1,200 1999 Dec 31 Depreciation $1,200 2000 Dec 31 Prov.for dep. $1,000 2000 Dec 31 P&L a/c $1,000 2000 Jan 1 Bal. b/d $1,200 2000 Dec 31 Bal. c/d $2,200 2001 Jan 1 Bal. b/d $2,200 Dec31 Depreciation 1,000 B/S P&L $2,200

77 77 P & L a/c for year ended 31 Dec 1999 1999 Dec 31 Depreciation $1,200 P & L a/c for year ended 31 Dec 2000 2000 Dec 31 Depreciation $1,000 Dep

78 78 Balance Sheet as at 31 Dec 1999 Fixed asset Office equipment $8,000 Balance Sheet as at 31 Dec 2000 Fixed asset Office equipment $8,000 Less Prov. for dep. 1,200 $6,800 Less Prov. For dep. 2,200 $5,800 Dep O/E

79 79 Provision for Depreciation account shows accumulated depreciation of fixed asset. IMPORTANT FEATURES: Fixed asset account shows original cost of asset. Book value of fixed asset (in Balance Sheet) is original cost less Provision for Depreciation.

80 80 COMPARE THE 3 METHODS OF DEPRECIATION Depreciation amount per successive year Depreciation mtdsConstantDecrease Increase Straight Line Reducing Balance Revaluation * X X X X X *Depreciation can either be constant, decrease or increase with every successive year depending on the valuation of the fixed asset at the end of the accounting period.

81 81 HOMEWORK Textbook Betsy Li p318 Q6. GCE ‘O’ Level Principles of Accounts June 1997 Q3(b) & (c).

82 82 THE END


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