MODULE THREE: TRIAL BALANCE AND FINAL ACCOUNTS
3.1 Depreciation is the wear and tear in the value of assets
3.1.3 Accounting Entry for Depreciation
The accounting entry for depreciation for straight line and reducing balance methods are basically the same, it is only the computation of depreciation expenses that there is difference.
There are two methods of recording depreciation in the books:
i. The old method ii. The modern Method The Old Method
This is where the double entry for each year’s depreciation charge is recorded in the asset account.
The accounting procedures of the old method are as stated below:
1. When asset is purchased:
Debit - Asset Account
Credit - Bank /Cash (or creditor if it is purchased on credit) Account.
2. When depreciation is charged at the end of the period:
Debit - Depreciation account Credit - Asset Account
3. Transfer the depreciation expense to profit and loss account at the end of the accounting period
Debit - Profit and Loss Account Credit - Depreciation Account
4. The depreciation charges will be deducted from the book value of the asset in the balance sheet at the end of the period.
The Modern Method
In this case, depreciation is not recorded in the asset account instead it is shown accumulating in a separate account.
The accounting procedures for the modern method is as stated below:
1. When an asset is newly purchased:
Debit - Asset Account
Credit - Cash/Bank (or creditor if it is bought on credit) Account.
2. When depreciation is charged at the end of the period:
Debit - profit and Loss Account
Credit - Provision for Depreciation Account
3. In the Balance sheet, the accumulated depreciation is deducted from the cost price of the asset.
Example (Involving the use of the old method)
Kokumo and Sons Enterprises Purchased the following motor vehicles on the stated dates:
January 1, 19 x 4 - 2 motor vehicles at N50,000 each by cheque.
June 30, 19 x 5 - 3 motor vehicles at N40,000 each by cheque
December 31, 19 x 5 - 1 Motor vehicle at N60,000 from Laco Ltd on credit.
The rate of depreciation is assumed to be 20% per annum. You are to record the above transactions in the motor vehicles account with its depreciation on both straight-
line and reducing balance methods for 19 x 4, 19 x 5 and 19 x 6. Show also how it will appear in the profit and Loss Account and the Balance Sheet for the same periods.
Solution
Straight-Line method
Depreciation Account 19 x 4
Dec 31 motor vehicles 19 x 5
Dec 31 Motor Vehicles 19 x 6
Dec 31 Motor Vehicles
N 19 x 4 N
20,000 Dec 31 Profit and Loss 20,000
19 x 5 32,000
32,000 Dec 31 Profit and Loss 19 x 6
56,000 Dec 31 Profit and Loss 56,000 Motor Vehicles Account
19 x 4 N 19 x 4 N
Jan 1 Bank 100,000 Dec 31 Depreciation 20,000
31 Bal c/d 80,000
100,000 100,000
19 x 5 19 x 5
Jan 1 Bal b/d 80,000 Dec 31 Depreciation 32,000
Bank 120,000
Dec 31 Loca Ltd 60,000 31 Bal c/d 228,000
260,000 260,000
19 x 6 19 x 6
Jan 1 Bal b/d 228,000 Dec 31 Depreciation 56,000
31 Bal c/d 172,000
228,000 228,000
19 x7
Jan 1 Bal b/d 172,00
Kokumo and Sons Enterprise Profit and Loss Account (Extracts)
19 x 4 N 19 x 4 N
Dec 31 Depreciation 20,000 19 x 5
Dec 31 Depreciation 32,000
19 x 6
Dec 31 Depreciation 56,000
Kokumo and Sons Enterprises Balance Sheet as at 31st December, …….(Extracts)
19 x 4 N N
Motor Vehicles 100,000 Less Depreciation 20,000
80,000 19 x 5
Motor Vehicles 260,000 Less Depreciation 32,000
228,000 19 x 6
Motor vehicles 228,000 Less Depreciation 56,000
172,000 Workings: All dates end on 31st December
19 x 4 N
Jan 1 Motor Vehicles N100,000 x 20% = 20,000 19 x 5
Jan 1 Motor vehicles N100,000 x 20% = 20,000 June 30 Motor vehicles 120,000 x 20% x 6/12 = 12,000 Dec 31 Motor vehicles, No Depreciation = -
32,000 19 x 6
Jan 1 Motor vehicles N100,000 x 20% = 20,000 1 Motor vehicles N120,000 x 20% = 24,000 1 Motor vehicles N60,000 x 20% = 12,000 56,000
Reducing Balance method Motor vehicles Account
19 x 4 N 19 x 4 N
Jan 1 Bank 100,000 Dec 31 Depreciation 20,000
31 Bal c/d 80,000
100,000 100,000
19 x 5 19 x 5
Jan 1 Bal b/d 80,000 Dec 31 Depreciation 28,000 Jan 30 Bank 120,000
Dec 31 Loca Ltd 60,000 31 Bal c/d 232,000
260,000 260,000
19 x 6 19 x 6
Jan 1 Bal b/d 232,000 Dec 31 Depreciation 46,400
31 Bal c/d 185,600
232,000 232,000
19 x7
Jan 1 Bal b/d 185,600
Depreciation Account
19 x 4 N 19 x 4 N
Dec 31 Motor vehicles 20,000 Dec 31 Profit and Loss 20,000
19 x 5 19 x 5
Dec 31 Motor vehicles 28,000 Dec 31 Profit and Loss 28,000
19 x 6 19 x 6
Dec 31 Motor vehicles 46,400 Dec 31 Profit and Loss 46,400
Kokumo and Sons Enterprises Profit and Loss Account (Extracts) 19 x 4
Dec 31 Depreciation 19 x 5
Dec 31 Depreciation 19 x 6
Dec 31 Depreciation
N 19 x 4 N
20,000 28,000
19 x 6
46,400 Dec 31 Profit and Loss 46,400 Kokumo and Sons Enterprises
Balance Sheet as at 31st December,….. (Extract)
19 x 4 N N
Motor Vehicles 100,000
Less Depreciation 20,000
80,000 19 x 5
Motor vehicles 260,000
Less depreciation 28,000
232,000 19 x 6
Motor vehicles 228,000
Less Depreciation 46,400
185,600 Workings: All dates and on 31st December
19 x 4 N N
Jan 1 Motor vehicles N100,000 x 20% 20,000
19 x 5
Jan 1 Motor vehicles N80,000 x 20% 16,000 June 30 Motor Vehicle N120,000 x 20% x 6/12 12,000 Dec 31 Motor vehicles - No Depreciation -
28,000 19 x 6
Jan 1 Motor vehicles 232,000 x 20% 46,400
Example (Involving the new method)
The financial year end of Rainbow and friends Enterprises is 31st December annually.
The following machines were purchased:
1st January, 19 x 4, 2 machines at N80,000 by cash 31st August, 19 x 4, 1 machine at N60,000 by cheque
1st December, 19 x 4, 3 machines at N40,000 each on credit from John Bros 31st December, 19 x 4 1 machine at N30,000 by cheque.
31st March, 19 x 5, 2 machines at N50,000 each by cheque.
Depreciation is charged at 25%
You are required to show:
i. The machinery account
ii. The provision for depreciation account iii. The provision and loss accounts extracts, and
iv. The balance sheet extracts for the following years: 19 x 4, 19 x 5 and 19 x 6
Solution
Machinery Account
19 x 4 N 19 x 4 N
Jan 1 Cash 80,000 Dec 31 Bal c/d 290.000
Aug 31 Bank 60,000
Dec 1 John Bros 120,000
Dec 31 Bank 30,000
290,000 290,000
19 x 5 19x 5
Jan 1 Bal b/d 290,000 Dec 31 Bal c/d 390,000
Mar 31 Bank 100,000
390,000 390,000
19 x 6 19 x 6
Jan 1 Bal b/d 390,000 Dec Bal c/d 390,000
19 x 7
Jan 1 Bal b/d 390,000
Provision for Depreciation Account
19 x 4 N 19 x 4 N
Dec 31 Bal c/d 27,500 Dec 31 Profit and Loss 27,500
19 x 5 19 x 5
Dec 31 Bal c/d 118,750 Jan 1 Bal b/d 27,500
Dec 31 Profit and Loss 91,250
118,750 118,750
19 x 6 19 x 6
Dec 31 Bal c/d 216,250 Jan 1 Bal b/d 118,750
Dec 31 Profit and Loss 97,500
216,250 216,250
19 x 7
Jan 1 Bal b/d 216, 250
Rainbow and friends Enterprises
Profit and Loss Account for the year ended 31st December,………
Extracts
N N
9 x 4 Provision for Depreciation 27,500 19 x 5 Provision for depreciation 91,250 19 x 6 Provision for Depreciation 97,500
Rainbow and Friends Enterprises
Balance Sheet as at 31st December, ……….
Extracts
19 x 4 N N
Machinery 290,000
Less Provision for Depreciation 27,500
262,500 19 x 5
Machinery 390,000
Less provision for Depreciation 118,750
271,250 19 x 6
Machinery 390,000
Less Provision for Depreciation 216,250
173,750
Workings on depreciation charge per year:
All dates end on 31st December.
19 x 4 N N
Jan 1 N 80,000 x 25% = 20,000
Aug 31 N 60,000 x 25% x 4/12 = 5,000 Dec 1 N 120,000 x 25% x 1/12 = 2,500 Dec 31 N 30,000 - No depreciation = NIL
27,500 19 x 5
Jan 1 N290,000 x 25% = N 72,500 Mar 31 N100,000 x 25% x 9/12 = 18,750
91,250 19 x 5
Jan 1 N390,000 x 25% = 97,500
Reducing Balance Method Provision for Depreciation Account
19 x 4 N 19 x 4 N
Dec 31 Bal c/d 27,500 Dec 31 Profit and Loss 27,500
19 x 5 19 x 5
Dec 31 Bal c/d 111,875 Jan 1 Bal b/d 27,500
Dec 31 Profit and Loss 84,375
111,875 111,875
19 x 6 19 x 6
Dec 31 Bal c/d 181,506 Jan 1 Bal b/d 111,875
Dec 31 Profit and Loss 69,531
181,406 181,406
Rainbow and Friends Enterprises
Profit and Loss Account for the year ended 31st December, ……..
Extracts
N N
9 x 4 27,500
19 x 5 84,375
19 x 6 69,531
Rainbow and Friends Enterprises
Balance Sheet as at 31st December, ……… (Extracts)
19 x 4 N N
Machinery 290,000
Less provision for Depreciation 27,500
262,000 19 x 5
Machinery 390,000
Less Provision for depreciation 111,000
278,125 19 x 6
Machinery 228,000
Less provision for Depreciation 181,406
208,594 Workings on depreciation charge per year: All dates end on 31st December.
19 x 5 N N
Jan 1 N262,500 x 25% = 65,625
Mar 31 N100,000 x 25% x 9/12 = 18,750
84,375 19 x 6
Jan 1 278,125 x 25% = 69,531
Note:
i. The machinery account under both straight - line and reducing balance methods are the same. There is no change in the recording of transactions.
ii. The depreciation for the first year 19 x 4 under both methods are the same.
4.0 Conclusion
In this unit, we have so far gotten acquainted with adjustment in the final accounts especially as regards to depreciation. The various methods of calculating depreciation were highlighted. The accounting entry procedure for depreciation of old and modern methods were equally mentioned and discussed. Worked examples involving the use of old and modern methods of treating depreciation in accounting palance were demonstrated.
5.0 Summary
Having gone through this unit, you should have learnt that:
• Adjustments in accounting is the process whereby necessary amendments in form of additions, deductions and provisions are made to income and expenditure in the financial statements to reflect the true and fair state of the final accounts of a business during the financial period under considerations.
• Depreciation is the wear and tear in the value of assets.
• There are various methods of charging depreciation over the life span of an asset such as: The straight line method, the reducing balance method, revaluation method, sinking fund method, depletion unit method and production unit method.
• The accounting entry for depreciation for straight line and reducing balance methods are basically the same, it is only in computation of depreciation expenses that there is difference.
• There are two methods of recording depreciation in the books:- The old method and the modern method.
6.0 Tutor Marked Assignment
1. What is depreciation
2. Calculate the depreciation charge per annum on a machine costing N300,000 having a life span of five years with a salvage value of N10,000 at the end of its useful life.
3. A machine costs N200,000 and the rate of depreciation for it is 20% per annum.
Using reducing balance method, you are required to calculate the depreciation charge on the machine for 4 years.
4. Debo and Sons Enterprises maintains a system of double entry in which depreciation is recorded in the assets account. The depreciation policy for motor vehicles is reducing balance method based on monthly ownership at the rate of 20% per annum.
The financial year ends on 31st December annually. The following motor vehicles were purchased on the stated dates.
January 1, 2004 2 motor vehicles at N500,000 each June 30, 2004 1 motor vehicle at N400,000 March 31, 2006 1 motor vehicle at N600,000
On 1st October, 2006, one of the motor vehicles bought for N500,000 was disposed of for N350,000. On 30th April, 2007, motor vehicle bought for 400,000 on June 30, 2004 was disposed of for N200,000 and another was purchased for N300,000.
You are required to show:
iv. Motor vehicles account incorporating the disposal account.
v. Depreciation account
vi. Profit and loss account (Extracts) and
vii. Balance Sheet (Extracts) for 2004, 2005, 2006, and 2007.