15-1 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

Chapter 15 – Depreciation, Disposal of Assets and

Asset Registers

Learning Outcome

This chapter shows how to calculate depreciation, account for asset disposals,

prepare associated journal entries and ledger accounts, and prepare an Asset Register.

15-2 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

KEY TERMS• Accumulated depreciation• Asset Register• Carrying amount of asset sold• Current assets• Depreciation• Disposal of asset

15-3 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

KEY TERMS cont…• Non-current asset• Proceeds from sale of asset• Profit or loss on disposal• Reducing balance method of depreciation• Register of property, plant and equipment

15-4 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

KEY TERMS cont…

• Residual value • Straight line method of depreciation• Sum of the digits method of depreciation• Trade-in value• Units of use method of depreciation

15-5 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DEFINITIONS• Accumulated depreciation is the total depreciation

charged to date and is deducted from the asset in the Balance Sheet.

• An Asset Register is a complete record of individual assets.

• The carrying amount of asset sold is the combination of the cost value of the asset and the accumulated depreciation to the date of sale into one account, which is closed to the Profit and loss account.

15-6 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

Definitions cont…• Current assets are assets that are expected to be

converted to cash within a 12-month period.• Depreciation is the amount charged as an expense

against revenue earned by the asset over its useful life.

• Disposal of asset account brings together the original cost of assets, accumulated depreciation, amount received on disposal and profit or loss on disposal.

15-7 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DEFINITIONS cont…• Non-current assets are expected to be retained by

the business for periods in excess of 12 months.• Profit or loss on disposal is the amount calculated

in the disposal account.• Reducing balance method of depreciation involves

the uniform percentage of depreciation being applied to the written down value of the asset.

15-8 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DEFINITIONS cont…• Register of property, plant and equipment contains

a complete record of individual assets. It is manual or computerised.

• Residual value is the amount the asset is expected to be sold for after the end of the useful life.

• Straight line method of depreciation involves allocating the depreciation cost evenly over the life of the asset.

15-9 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

NON-CURRENT ASSETS• Acquired for use in the business• Not for resale• Expected use more than 12 months; for example:

– Buildings– Plant and equipment– Motor vehicles– Office furniture– Shop fittings– Computer equipment

15-10 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

CAPITAL COST OF NON-CURRENT ASSETS• Cost of getting the asset operational• Associated cost added to cost of asset; for

example:– delivery charges– installation costs– integrated software in computer systems.

• Costs add to the value of an asset before depreciation is calculated

15-11 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

AUSTRALIAN ACCOUNTING STANDARDS

• Depreciable amount to be allocated from time asset is first put to use.

15-12 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DEPRECIATION• Recorded in General journal

30 June Depreciation $$$$

Accumulated depreciation $$$$

Recording depreciation expense for year ended…..

15-13 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

Depreciation cont…

15-14 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DEPRECIATION ACCOUNTS• Depreciation expense account

– Closed off to Profit and loss account at financial year end– Depreciation expense debited to this account

• Accumulated depreciation account– Shows total amount of depreciation accumulated since

asset first used– Not closed off– Balance Sheet account

15-15 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

BALANCE SHEET

• Record of assets• Assets shown at original cost• Deduct accumulated depreciation• Shows asset net value

15-16 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

METHODS OF DEPRECIATION• ‘Units of Use’ method (based on items produced)• ‘Sum of Digits’ method• ‘Straight-line’ method• ‘Reducing Balance’ method• No particular method specified by Accounting

Standards

15-17 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

METHODS OF DEPRECIATION cont…

• Australian Tax Office allows two methods to calculate deductions:– ‘straight line’ (prime cost) method– ‘reducing balance’ method.

15-18 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

STRAIGHT LINE METHOD

15-19 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

REDUCING BALANCE METHOD

15-20 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

DISPOSAL OF DEPRECIABLE ASSETS

15-21 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

STEPS TO DISPOSE OF ASSET1. Calculate depreciation to date of sale.

2. Open Disposal account in ledger.

3. Transfer asset cost of Disposal account.

15-22 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

STEPS TO DISPOSE OF ASSET cont...

4. Transfer accumulated depreciation to Disposal account.

5. Credit Disposal account with money received for asset.

6. Profit or loss is calculated on difference between debits or credits.

15-23 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Introductory Accounting 2r, by David WillisBy Kaye Watson

ASSET REGISTER• Detailed information on individual assets • Functions

– Internal control identifies asset and location– Shows complete history for individual assets– Allows access to information used to calculate

depreciation