Step 6 - Dealing with adjustments - Depreciation

Step 6 - Dealing with adjustments - Depreciation

Straight line (On cost)

Records an equal portion of the cost of the non current asset as depreciation expense in each accounting period in which the non current asset is used.

Formula:

Depreciation expense =      (Cost - Scrap value) / Useful life                                      

                                                 

or

Depreciation expense = % fixed depreciation X (cost-scrap value)

So,

Furniture depreciation Cost = 21,000 Depn = 10% × 21,000 = 2,100

To Record:

SOPL - Depreciation : Furniture  = 2,100 (Expense for that period)

SOFP - add to new accumulated depreciation balances for Furniture 2,100

Office equipment depreciation

Office equipment at Cost = 15,000 Depn = 20% × 15,000 = 3,000

To Record:

SOPL -  Depreciation : Office equipment = 3,000 (Expense for that period)

SOFP - add to accumulated depreciation balances for Office equipment 

From Trial Balance 3,000 + 3,000 = 6,000

Motor Vehicles depreciation

Motor Vehicles at cost = 60,000 (From Trial Balance) Accumulated Depreciation (1 Jan 2023) = 12,000 (From Trial Balance)

NBV at start of year = 60,000 − 12,000 = 48,000 Depn = 20% × 48,000 = 9,600

To Record: SOPL - Depreciation : Motor Vehicles = 9,600 (Expense for that period) SOFP - add to new accumulated depreciation balances for Motor Vehicles

From Trial Balance 12,000 + 9,600 = 21,600

Additional Notes : Reducing Balance Method (net book value (NBV))

Calculate depreciation expense for each accounting period by multiplying in fixed percentage with the assets net book value (NBV). Formula: Depreciation expense = % fixed depreciation X NBV for each year *Net Book Value (NBV) = Cost – Accumulated Depreciation. Example: Assume that a business has a motor vehicle, which was purchased on1 January 20x1 for RM50000. The business’s policy is to depreciate motor vehicle at a rate of 30% annually. Calculate the depreciation expense for the motor vehicle for the first 5 years. Year Depreciation expense Accum. Depn. NBV (RM) (RM) 20x1 30% x RM50000 = RM15000 15000 35000 20x2 30% x RM35000 = RM10500 25500 24500 20x3 30% x RM24500 = RM7350 32850 17150 20x4 30% x RM17150 = RM5145 37995 12005 20x5 30% x RM12005 = RM3602 41597 8403 Depreciation Motor Vehicles = 10% x 38,000 = 3800 (Record SOPL) Depreciation Fixtures and Fittings Net Book Value (NBV) = Cost – Accumulated Depreciation. = 32700 - 11500 = 21200 Depreciation expense = % fixed depreciation X NBV for each year = 20% x 21200 = 4240 (Record SOPL) Record in SOFP Accumulated Depreciation Motor Vehicles = 11400+3800 = 15200 (SOFP) Accumulated Fixtures and Fittings = 11500+4240 = 15740 (SOFP)