learning unit 3

Learning Unit 3: Depreciable Assets

Learning Objectives

• Apply different methods of depreciation.

• Make necessary accounting entries for depreciation.

• Record entries concerning depreciation in the General Ledger and General Journal.

• Explain the purpose of an asset register.

• Apply the four steps of asset disposal.

• Record entries concerning asset disposal in the General Ledger and General Journal.

• Prepare the note to the financial statements related to property, plant, and equipment.

Introduction

• Non-Current Assets: Resources controlled by an entity for longer than one year, resulting from past events, expected to yield future economic benefits.

• Value Fluctuation: Non-current assets may appreciate (e.g., real estate) or depreciate over time. Loss in value termed as depreciation.

• Key Concept: Focus on bookkeeping and accounting treatment of depreciable assets, disposal procedures, and profit/loss calculations from disposals.

Key Terms

• Depreciation: Reduction in asset value over time, considered an expense.

• Accumulated Depreciation: Total recorded depreciation on an asset up to a specific date.

• Residual Value: Estimated value of a fixed asset at the end of its useful life.

• Carrying Value: Cost of an asset minus accumulated depreciation; also known as current value or book value.

Methods of Depreciation

• Straight-Line Method:

  • Depreciation calculated on cost of the asset using a predetermined rate.

  • Formula: Dep = Cost / Useful Life x Time or Dep = Cost x Rate x Time.

• Diminishing Balance Method:

  • Depreciation calculated as a percentage of the carrying value of the asset.

  • Formula: Dep = (Cost – Accumulated Depreciation) x Rate x Time.

Calculating Depreciation (Example)

• Machine Cost: R300,000 purchased on January 1, 2020, with a useful life of 4 years or 25%.

  1. Straight-Line Method for 2022:

     • R300,000 x 25% = R75,000.

  2. Diminishing Balance Method for 2020 to 2022:

     • 2020: R300,000 x 25% = R75,000.

     • 2021: (R300,000 - R75,000) x 25% = R56,250.

     • 2022: (R300,000 - R75,000 - R56,250) x 25% = R42,187.50.

Journal Entry for 2022 Depreciation

• Date: 31/12/2022

  • Straight-Line Method:

    • Debit: Depreciation R75,000

    • Credit: Accumulated Depreciation R75,000

  • Diminishing Balance Method:

    • Debit: Depreciation R42,187.50

    • Credit: Accumulated Depreciation R42,187.50

Asset Disposal

• Definition: Disposal of assets through sale, trade-in, donation, etc.

• Steps to Record Asset Disposal:

  1. Remove the asset cost from the asset account.

  2. Remove accumulated depreciation of the asset from the accumulated depreciation account.

  3. Record the sale.

  4. Calculate profit/loss on the sale of the asset.

Completing the Asset Disposal Account

• Necessary Information:

  1. Cost of the asset.

  2. Accumulated depreciation at the date of sale.

  3. Selling price of the asset.

Example of Balances from Blue@Bulls (as of 30 September 2014)

• Land and Buildings: R1,152,000

• Vehicles: R288,000

• Equipment: R806,200

• Accumulated Depreciation: Vehicles: R158,400; Equipment: R466,200

• Additional Information:

  • Vehicle cost: R144,000; accumulated depreciation: R79,200; sold on 30 September 2015 for R70,000 cash.

  • Depreciation rates: Land/buildings (None), Vehicles (20% p.a., diminishing balance), Equipment (25% p.a., straight method).

• Required Analysis: Prepare journal entries, asset disposal accounts, and a note to the financial statements for Blue@Bulls for the year ended 30 September 2015, ignoring VAT.