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Account ss1 term 3
MEANING OF FIXED ASSETS AND COST OF FIXED ASSETS
Account ss1 term 3 third term
Fixed assets are properties, plant and equipment which represent tangible resources of an organization.
Cost of fixed assets
This is the cost measured by the cash or cash equivalent price paid to obtain the asset, and to bring it to the location and condition necessary for its intended use. Thus, the purchase price, freight costs (transport), installation costs of a productive asset and other necessary incidental costs are considered as part of asset cost.
Account ss1 term 3 third term
Illustration 1
An equipment for bread-making was ordered from the United State of America at an invoice price of N120,000,VAT N6,000,installation and start-up cost N55,000.What is the total cost of the machine.
Solution:
₦
Invoice price 120,000
Freight (transport) 20,000
VAT 6,000
Installation and start-up 55,000
201,000
EVALUATION
What are fixed assets?
Mention four fixed assets that you know
Mention four components of the costs of fixed assets
MEANING OF DEPRECIATION
Depreciation can be defined as a reduction in the economic value of an asset as a result of wears, tears, usage and passage of time. When fixed assets are sold, the part of cost not recovered is termed DEPRECIATION
Reasons for charging depreciation
Since depreciation is a charge against profit, the tax to be paid on the profit by the firm will be reduced.
The amount charged as depreciation can be used for the replacement of the asset at the end of the useful life
It follows the matching concept, the cost of assets are spread over its useful life.
Causes of depreciation
Wear and tear.
Obsolescence
Passage of time
Depletion
Inadequacy
Elements of depreciation
Original cost: This is the cost incurred in purchasing, installation and cost of carriage
Estimated cost: This scrap value. The amount which can be recovered when the asset is sold at the end of useful life.
Estimated useful life: The expected number of year through which an asset can last.
METHODS OF DEPRECIATION
There are various methods of depreciating fixed assets. These are:
Straight line method
Diminishing or Reducing balance method
Annuity method
Sinking fund method
Retirement and replacement method
Sum of the year digit method
Depletion unit method
Insurance policy system
Revaluation method
The method to be adopted is a matter of policy on the part of management of the business. However, consistency must be applied.
Account ss1 term 3 third term
The main methods of calculating provisions for depreciation are:
Straight line method
Reducing balancing method
STRAIGHT LINE METHOD
This allows an equal amount to be charged as depreciation for each year of expected use of the asset.
The basic formula is:
Cost−Estimated Residual ValueNumber of years of expected use
Example1: A machine costs N10,000,it has an expected life of four years and has an estimated residual value of N256.What is the depreciation provision per annum?
Solution:
Depreciation provision per annum
=₦10,000−₦2564=₦2,436
Column 1 2 3 4 5
Years Cost of Asset ₦ Depreciation per annum ₦ Accumulated depreciation ₦ Net book value ₦
1 10,000 2,436 2,436 7,564
2 10,000 2,436 4,872 5,128
3 10,000 2,436 7,308 2,692
4 10,000 2,436 9,744 256
From the table, equal amount was charged as depreciation every year.
Note:
Column 1 – Represents the estimated useful life
Column 2 – Cost of Assets
Column 3 – Depreciation rate;-using th e formula
Column 4 – Accumulated depreciation;-addition of annual depreciation
Column 5 – Net book value:-This is arrived at by deducting the accumulated depreciation from the cost of the asset.
Accounting entries
There are two methods of for preparing depreciation accounts. These are the:
Old method
New method
The Old Method
Account ss1 term 3 third term
Under this method, the amount charged as provision for depreciation is shown in the assets accounts. It is referred to as old method because it has fallen into disuse. The following accounts are prepared.
Assets accounts
Depreciation accounts
Profit and loss accounts
BALANCE SHEET EXTRACT
The procedures are:
Debit the asset account with the cost of the asset
Credit the asset account with depreciation charge
Debit the depreciation account with depreciation charge
Debit the profit and loss account with depreciation charge
Credit the depreciation account with depreciation charge
LEDGER ENTRIES
Format
Account ss1 term 3 third term
ASSET ACCOUNT
DR CR
2001 ₦ 2001 ₦
Jan 1 Cash XX Dec 31 Depreciation XX
Balance c/d XX
XX XX
2002 2002
Jan 1 Balance b/d XX Dec 31 Depreciation XX
Balance c/d XX
XX XX
2003 Expenses
Jan 1 Balance b/d XX
DEPRECIATION ACCOUNT
DR CR
2001 ₦ 2001 ₦
Jan 1 Asset XX Dec 31 Profit and loss XX
2002 2002 ₦
Jan 1 Asset XX Dec 31 Profit and loss XX
PROFIT AND LOSS ACCOUNT
DR CR
₦
2001 Depreciation XX
2002 Depreciation XX
BALANCE SHEET EXTRACT
DR CR
2001 ₦
Asset XX
Less depreciation XX XX
2002 ₦
Asset XX
Less depreciation XX XX
Ledger Entries of example 1 above:
MACHINE ACCOUNT
DR CR
₦ ₦
2001 Jan 1 Cash 10,000 2001 Dec 31 Depreciation 2,436
Balance c/d 7,564
10,000 10,000
2002 Jan 1 Balance b/d 7,564 2002 Dec 31 Depreciation 2,436
Balance c/d 5,128
7,564 7,564
2003 Jan 1 Balance b/d 5,128 2003 Dec 31 Depreciation 2,436
Balance c/d 2,692
5,128 5,128
2004 Jan 1 Balance b/d 2,692 2004 Dec 31 Depreciation 2,436
Balance c/d 256
2,692 2,692
Balance c/d 256
DEPRECIATION ACCOUNT
DR CR
₦ ₦
2001 Jan. 1 Machine 2,436 2001 Dec. 31 Profit and loss 2,436
2002 Jan. 1 Machine 2,436 2002 Dec. 31 Profit and loss 2,436
2003 Jan. 1 Machine 2,436 2003 Dec. 31 Profit and loss 2,436
2004 Jan. 1 Machine 2,436 2004 Dec. 31 Profit and loss 2,436
PROFIT AND LOSS ACCOUNT
Account ss1 term 3 third term
DR CR
₦
2001 Depreciation 2,436
2002 Depreciation 2,436
2003 Depreciation 2,436
2004 Depreciation 2,436
BALANCE SHEET EXTRACT
DR CR
2001 ₦ ₦
Machine 10,000
Less depreciation 2,436 7,564
2002
Machine 7,564
Less depreciation 2,436 5,128
2003
Machine 5,128
Less depreciation 2,436 2,692
2004
Machine 2,692
Less depreciation 2,436 256
EVALUATION:
Mention five methods of depreciation.
Define straight line method of depreciation.
List two methods of preparing depreciation accounts.
Account ss1 term 3 third term
MODERN METHOD
Under this method, there will be a separate account called provision for depreciation account. The assets are always shown at cost price. Most firms are now using this method because it is more revealing. The following accounts are prepared:
Asset account
Provision for depreciation account
Profit and loss account
Balance sheet extract
Format
ASSET ACCOUNT
DR CR
₦ ₦
2001
Jan. 1 Cash XX
PROVISION FOR DEPRECIATION ACCOUNT
Account ss1 term 3 third term
DR CR
₦ ₦
2001 Dec. 31 Balance c/d XX 2001 Dec. 31 Profit and loss XX
2002 Dec. 31 Balance c/d XX 2002 Jan. 1 Balance b/d XX
2002 Dec. 31 Profit and loss XX
XX
XX 2003 Jan. 1 Balance b/d XX
PROFIT AND LOSS ACCOUNT
DR CR
₦
2001 Depreciation XX
2002 Depreciation XX
BALANCE SHEET ACCOUNT
DR CR
2001 ₦
Asset XX
Less depreciation XX XX
2002 ₦
Asset XX
Less depreciation XX XX
The modern method will be used to work the Example 1
MACHINE ACCOUNT
DR CR
₦
2001 Cash 10,000
PROVISION FOR DEPRECIATION ACCOUNT
Account ss1 term 3 third term
DR CR
₦ ₦
2001 Dec. 31 Balance c/d 2,436 2001 Dec. 31 Profit and loss 2,436
2002 Balance c/d 4,872 2002 Jan. 1 Balance b/d 2,436
Dec. 31 Profit and loss 2,436
4,872 4,872
2003 Balance c/d 7,308 2003 Jan. 1 Balance b/d 4,872
Dec. 31 Profit and loss 2,436
7,308 7,308
2004 Balance c/d 9,744 2004 Dec. 31 Balance b/d 7,308
Profit and loss 2,436
9,744 9,744
PROFIT AND LOSS ACCOUNT
DR CR
₦
2001 Depreciation 2,436
2002 Depreciation 2,436
2003 Depreciation 2,436
2004 Depreciation 2,436
BALANCE SHEET
DR CR
2001 ₦ ₦
Machine at cost 10,000
Less depreciation 2,436 7,564
2002
Machine at cost 10,000
Less depreciation 4,872 5,128
2003
Machine at cost 10,000
Less depreciation 7,308 2,692
2004
Machine at cost 10,000
Less depreciation 9,744 256
Evaluation
Account ss1 term 3 third term
Define depreciation.
Highlight three reasons for charging depreciation.
State five causes of depreciation.
List three elements of depreciation.
Outline two advantages of straight line method of depreciation
RELATED TO: Depreciation of Fixed Asset I
Depreciation of Fixed Asset II
Hire Purchase
Compound Interest
Contract Account
Balance Sheet II: Layout and Preparation
Lesson tags: Financial Accounting Lesson Notes, Financial Accounting Objective Questions, SS1 Financial Accounting, SS1 Financial Accounting Evaluation Questions, SS1 Financial Accounting Evaluation Questions Third Term, SS1 Financial Accounting Objective Questions, SS1 Financial Accounting Objective Questions Third Term, SS1 Financial Accounting Third Term
Take The Test
Depreciation of Fixed Asset II
METHODS OF DEPRECIATION
THE DIMINISHING OR REDUCING BALANCE METHOD OF DEPRECIATION
Account ss1 term 3 third term
In this method, a fixed percentage is written off the diminishing balance of the asset yearly. The total depreciation is spread over the anticipated useful life of the asset by annual installments of diminishing amount. This method of depreciation is advantageous because depreciation is more scientifically provided for.
Depreciation rate is computed using this formula: residual valuecost−−−−−−−−−√1−N
Where N = the number of years (useful life of the asset)
Example: A motor van cost N10,000 in 2005. It has an expected life span of four years and the estimated residual value of N256. What is the depreciation rate?
SOLUTION
Rate of Depreciation, R=residual valuecost−−−−−−−−−√1−NR=₦250₦10,000−−−−−√1−4
The depreciation calculation applied to each of four years of use would be:
₦
Cost: 10,000
Year 1 Depreciation (60% of ₦10,000) 6,000
4.000
Year 2 Depreciation (60% of ₦4,000) 2,400
1,600
Year 3 Depreciation (60% of ₦1,600) 960
640
Year 4 Depreciation (60% of ₦640) 384
Scrap value 256
DEPRECIATION SCHEDULE
Years Book value at beginning ₦ Depreciation ₦ Accumulated depreciation ₦ Net book value ₦
1 10,000 6,000 6,000 4,000
2 4,000 2,400 8,400 1,600
3 1,600 960 9,360 640
4 640 256 9,616 256
Accounting entries (with modern method)
The following accounts will be prepared:
Motor van account
Provision for depreciation account
Profit and loss account
Balance sheet extract
MOTOR VAN ACCOUNT
DR CR
₦ ₦
2005
Jan. 1 Cash 10,000
PROVISION FOR DEPRECIATION – MOTOR VAN
DR CR
₦ ₦
2005 Dec. 31 Balance c/d 6,000 2005 Dec. 31 Profit and loss 6,000
2006 Dec. 31 Balance c/d 8,400 2006 Jan. 1 Balance b/d 6,000
2006 Dec. 31 Profit and loss 2,400
8,400 8,400
2007 Dec. 31 Balance c/d 9,360 2007 Jan. 1 Balance b/d 8,400
2007 Dec. 31 Profit and loss 960
9,360 9,360
2008 Dec. 31 Balance c/d 9,616 2008 Jan. 1 Balance b/d 9,360
2008 Dec. 31 Profit and loss 256
9,616 9,616
2009 Jan. Balance b/d 9,616
PROFIT AND LOSS ACCOUNT
DR CR
₦
2005 Depreciation 6,000
2006 Depreciation 2,400
2007 Depreciation 960
2008 Depreciation 256
BALANCE SHEET
DR CR
As at 31 Dec, 2005 ₦
Motor van at cost 10,000
Less depreciation 6,000 4,000
As at 31 Dec, 2006
Motor van at cost 10,000
Less depreciation 8,400 1,600
As at 31 Dec, 2007
Motor van at cost 10,000
Less depreciation 9,630 640
As at 31 Dec, 2008
Motor van at cost 10,000
Less depreciation 9,616 256
EVALUATION:
Define diminishing method of depreciation
Mention four accounts to be prepared in the above method
DISPOSAL OF ASSETS
Fixed assets can be sold in the course of the business. When the assets are sold, there must be profit or loss. When assets are disposed, the following accounts are prepared;
Assets account
Provision for depreciation account
Asset disposal account
Cash book
Profit and loss account
Balance sheet extract
Accounting entries (using modern method)
Procedures are:
(i) Debit asset disposal account with Cost price of asset
Credit asset account with Cost price of asset
Account ss1 term 3 third term
(ii) Debit provision for depreciation account with Accumulated depreciation
Credit asset disposal account with Accumulated depreciation
(iii) Debit cash book with cash or cheque received
Credit asset disposal account with cash or cheque received
(iv) Debit asset disposal account with profit on sale
Credit profit and loss account with profit on sale
(v) Debit profit and loss account with loss on sale
Credit asset disposal account with loss on sale
Example
A Machine was bought on 1January 2005 for N1, 000 and another one on 1 October 2006 for N1,200.The first machine was sold on 30 June 2007 for N720.The firm financial year ended on 31 December. The machinery is to be depreciated at 10% using the straight line method and based on assets in existence at the end of each year ignoring items sold during the year.
Ledger entries
MACHINE ACCOUNT
DR CR
₦ ₦
2005
Jan. 1 Cash 1,000
2006 2006
Oct. 1 Cash 1,200 Dec. 31 Balance c/d 2,200
2,200 2,200
2007 2007
Jan. 1 Balance b/d 2,200 Dec. 31 Disposals 1,000
Dec. 31 Balance c/d 1,200
2,200 2,200
2008
Jan. 1 Balance b/d 1,200
PROVISION FOR DEPRECIATION ACCOUNT
DR CR
₦ ₦
2005
Dec. 31 Profit and loss 100
2006 2006
Dec. 31 Balance c/d 320 Dec. 31 Profit and loss 220
320 320
2007 2007
Dec. 31 Disposals Jan. 1 Balance b/d 320
(2 years of 10% of ₦1, 000) 200 Dec. 31 Profit and loss 120
Dec. 31 Balance c/d 240
440 440
2008
Jan. 1 Balance b/d 240
DISPOSAL OF MACHINE ACCOUNT
DR CR
₦ ₦
2007 2007
Dec. 31 Machine 1,000 Jun. 30 Cash 720
Dec. 31 Provision for depreciation 200
Dec. 31 Profit and loss 80
1,000 1,000
PROFIT AND LOSS ACCOUNT
DR CR
₦
2005 Provision for depreciation 100
2006 Provision for depreciation 220
2007 Provision for depreciation 120
Provision for depreciation on machinery sold 80
BALANCE SHEET EXTRACT AS AT 31 DECEMBER
DR CR
2005 ₦
Machine at cost 1,000
Less depreciation 100 900
2006 ₦
Machine at cost 2,200
Less depreciation 320 1,880
2007 ₦
Machine at cost 1,200
Less depreciation 240 960
AMORTIZATION
Amortization is the provision for the consumption of an asset with legal life such as leases, patents and copyrights. In amortization, the cost of such lease is reduced by charging it to the profit and loss account.
Account ss1 term 3
