e) DEPRECIATION

It is the loss of value of a non-current asset throughout its period of use by the
firm. IAS 16 on property, plant and equipment defines depreciation as the
allocation of a depreciable amount of a non-current asset over its estimated useful
life.
Under the matching concept, all incomes or revenues and expenses for a
particular period should be reported in the financial statements and because
depreciation is an expense of the business therefore, it will be charged in the P&L
A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to
use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by
the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy:
Some assets lose value due to them becoming
inadequate e.g. when a
business grows or expands then some buildings may become
inadequate due to space. Also some machines that are unable
to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology
or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw
materials, minerals or oil. Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of
depreciation to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting
practice, accounting standards and suit the firms non-current assets. There are 2
main methods of estimating depreciation and 5 others that will apply in a firms
situation.
The main methods are: Straight-line method and Reducing Balance method. The
other 5 methods include:
i.
ii.
iii.

Sum of the digits methods uses a formular.

Revaluation method applies to a non-current asset of low value.
Machine-Hour method depreciation is based on number of hours a
machine is expected to operate (manufacturing process).

Lesson Four

iv.
v.

Unit of output method depreciation is based on the number of units a

machine is expected to produce.
Depletion of units depreciation is based on number of units extracted from
the asset.

Lesson Four

Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L
a/c for a particular asset and is based on the following formular:
Depreciation for year
20,000

Cost of asset Residual Value =

Estimated useful life

100,000 8

= 10,000 per
year.
Cost of Asset Residual Value
Estimated useful life of asset.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm,
also called Sales Value / Scrap Value.
Estimated Useful Life
The period the asset is expected to be used in the firm.
Example 4.1
A firm buys a machine for 100,000 which it expects to use in the firm for eight
years. After the eight years the machine will be sold for 20,000. Under the
straight-line method, the depreciation amount will be computed as follows:
This means for this asset 10,000 will be charged in the P&L account as
depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current
asset are spread out evenly over the life of the asset e.g. buildings use straight-line
method.
Percentage rate based on cost as opposed to number of years can also be used to
calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset
during the first period of use. The same rate is applied in the subsequent financial
periods but the rate is applied on the reduced value of the asset. (Cost of asset
total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L
account in the earlier periods of use and lower amounts in the latter periods of use
as shown in the following example:
Example 4.12

Lesson Four

Assume a firm buys machinery for 100,000 and provides depreciation on

machines at 20% p.a. on reducing balance method. The depreciation charged to
the P&L will be as follows for the next 3 years.

Lesson Four

Year 1

Cost
Depreciation 20% of 100,000
Balance to YR 2

80,000
(16,000)

P&L YR 2

64,000

Year 3
Depreciation 20 % of 64,000
Balance to YR 4

P&L YR 1

80,000

Year 2
Depreciation 20% of 80,000
Balance to YR 3

100,000
(20,000)

64,000
(12,800)

P&L YR 3

51,200

Reducing balance method (diminishing balance method) assumes that benefits

accruing from the use of an asset are higher in the first periods of use and
lower in the latter periods e.g.
Fixtures, furniture and fitting.
Plant and machinery.
Motor vehicles.
ACCOUNTING TREATMENT ON DEPRECIATION
When non-current assets are depreciated, a new account for each type of asset is
opened; this account is called a provision for depreciation whereby the following
entries will be made:
Debit P&L a/c
Credit Provision for depreciation a/c
With the amount of depreciation charged for the period.
Example on straight-line method
The entries will be as follows:
Debit P&L a/c with 10,000
Credit Provision for depreciation. Machines a/c with 10,000 being depreciation
provided for the machine.
The ledger accounts will be as follows:
Machinery
Machinery

Cashbook 100,000
31/12 Bal c/d
P&L
10,000

Provision for Depreciation

100,000

31/12 Bal c/d 10,000

Lesson Four

The final accounts extracts will be shown as follows:

(a) Profit And Loss Account (Extract) for the year ended
Expenses

Depreciation:
Buildings
x
Plant and machinery
Furniture, Fixtures and Fittings
Motor vehicles

10,000
x
x

(b) Balance sheet (Extract) as at________

Non Current Assets
Value)

Cost

Total

NBV (Net Book

Depreciation ()

Land
x
Buildings
x
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles
x

(x)
x
x
x

x
x

(x)
(x)
(x)
x

x
x
x
x

Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor
cars account and the provision for depreciation account for the year ended 31
December 2002 from the information given below. Depreciation is at the rate of 20
per cent per annum. Using the basis of one months ownership needs one months
depreciation.
2002

Bought two motor vans for 12,000 each on 1 January

Bought one motor van for 14,000 on 1 July.
Motorcars a/c

2002
1/1
Cashbook
1/7
Cashbook
38,000

2002
24,000
14,000
31/12
38,000

Bal c/d
38,000

Calculation for depreciation

1/1

24,000 x 20 x 12
100 12

= 4,800 + 1/7( 14,000 x 20 x 6

100 12

= 1,400 )

Lesson Four

= 4,800 + 1,400 = 6,200

Lesson Four

2002

Provision- Depreciation for Motor cars A/c

2002

31/12 Bal c/d

6,200

31/12

P&L

6,200

Profit And Loss Account (Extract) for the period.

Expenses

Depreciation:
Motor vans 6200

Balance Sheet (Extract) as at 31/12/2002

Non-current Assets
Motor vans

Cost
38,000

Total
Depreciation
(6200)

NBV
31,800

Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31
December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999 1 January
2000 1 July
1 October
2002 1 April

1 plant costing 8,000

2 plant costing 5,000 each
1 plant costing 6,000
1 plant costing 2,000

Depreciation is at the rate of 10 per cent per annum, using the straight-line
method, plant being depreciated for each proportion of a year.

Lesson Four

Plant a/c
199
8000
31/12

1999
1/1
Cashbook
2000
1/1
Bal b/d
1/7
Cashbook
1/10 Cashbook

2000
8000
10,000
6,000
24,000

2001
1/1
Bal b/d
24,000
2002
1/1
Bal b/d
1/4
Cashbook

8000

Bal c/d

31/12

2001
24,000

Bal c/d

31/12

2002
24,000
2,000 31/12
26,000

24,000
24,000

Bal c/d

Bal c/d

26,000
26,000

Calculation for Depreciation

1999
8,000 x 10/100 x 12/12

800

2000
10,000 x 10/100 x 6/12

500

6,000 x 10/100 x 3/12 =

150

8,000 x 10/100 x 12/12

=
800
1,450

2001
24,000 x 10/100 x 12/12

2400

2002
24,000 x 10/100 x 12/12

2400

2,000 x 10/100 x 9/12 =

150
2,250

Accumulated Depreciation
800

2,250
4,650

7,200

Lesson Four

1999
31/12 Bal c/d

10

Provision Depreciation Machines

1999

800 31/12 P&L

800

2000

31/12 Bal c/d

2000
1/1
Bal b/d
2,250
P&L

2,250
2001

31/12 Bal c/d

31/12 Bal c/d

800
1,450
2,250

2001
1/1
Bal b/d
4,650
P&L

4650
2002

2,250
2,400
4650

2002
1/1
Bal b/d
7,200
P&L

7,200

4,650
2,550
7,200

Balance Sheet (Extract) as at 31/12/99 31/12/02

Non Current Assets

Cost

Total
Depreciation

NBV

1999
Motor vans

8,000

1999
Motor vans

24,000

(2,250)

21,750

1999
Motor vans

24,000

(4,650)

19,350

1999
Motor vans

26,000

(7,200)

18,800

(800)

7,200

DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.

Lesson Four

11

When an asset is disposed and is no longer used by the firm, the appropriate
entries should be made in the asset account and the total depreciation provided to
date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
(a) Debit asset disposal a/c
Credit asset a/c
With the cost of the asset being disposed.
(b) Debit provision for depreciation of asset a/c.
Credit asset disposal a/c
With the total depreciation provided to date on the asset.
(c) Debit cashbook.
Credit asset disposal a/c
With the cash received on disposal.
When an asset is written off as a result of damage/accident/theft. If it was insured
and the insurance company accept liability but by the end of the period the
insurance company has not yet paid.
(a) Debit asset disposal a/c
Credit asset a/c
With the cost of the asset damaged.
(b) Debit provision for depreciation of asset a/c
Credit asset disposal a/c
(c) Debit insurance receivable a/c
Credit asset disposal a/c
With the amount expected from the insurance.
If the insurance pays before the end of the financial period, it will not be necessary
to create an insurance debtor so the following entries will be made:
Debit cashbook.
Credit asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries
will be made in the asset account and provision for depreciation a/c only.
Debit asset disposal a/c
Credit asset a/c
With the cost of the asset no longer in use.
Debit provision for depreciation for asset
Credit asset disposal a/c
With the total depreciation provided to date.
The balance in the disposal a/c after the above entries will either be a debit
balance or a credit balance. A credit balance represents a profit on disposal,

Lesson Four

12

which is reported in the profit and loss a/c together with other incomes. The entry
will be:
Debit asset disposal a/c
Credit P&L a/c
With the balance in the account.
A debit balance in the asset disposal a/c is loss on disposal which is reported in
the P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing 1,000 total depreciation provided to date is
800. The firm decides to trade in the motor vehicle with a new one the value of
the new one being 500. The supplier of the new vehicle agree with the firm that
the old motor vehicle is worth 300, therefore the difference will be paid by cash.

Bal b/d
Disposals
Cashbook

Motor vehicle a/c

1,000 Motor vehicle disposal

300
200 Bal c/d
500
1,500
1,500
=====
====

1,000

Motor Vehicle Disposal a/c

Motor vehicle
P&L

a/c

1,000
Provision for depreciation
100
Motor vehicle
300
1,100
1,100

JOURNAL ENTRIES

Debit motor vehicles disposal

1,000
Credit motor vehicles a/c
(Motor vehicle being traded in now transferred to disposal a/c)
Debit Provision for depreciation motor vehicles
Credit Motor vehicle disposal a/c
(Total depreciation provided for motor vehicle)

800

1,000

800
800

Debit Motor vehicle a/c

Credit Asset disposal a/c
- Cashbook
(New motor vehicle acquired by trade-in value
of 300 and cheque payment of 200)

500

Debit Asset disposal a/c

Credit P&L

100

300
200

100

Lesson Four

13

(Profit made on disposal)

In case of a loss,
Debit P&L a/c
Credit asset disposal a/c
If the firm trades in an old asset for a new one, the following entries will be made
in addition to the movements in the asset and depreciation a/c.
Debit asset a/c (value of the new asset)
Credit cashbook (cash paid as difference of new value i.e. trade in value of old
asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line
method, for each month of ownership. From the following details draw up the
plant account and the provision for depreciation account for each of the years
1999, 2000, 2001 and 2002.
1999 Bought plant costing 900 on 1 January.
Bought plant costing 600 on 1 October.
2001 Bought plant costing 550 on 1 July.
2002 Sold plant which had been bought for 900 on 1 January 1999 for the
sum of
275 on 30 September 2002.
You are also required to draw up the plant disposal account and the extracts from
the balance sheet as at the end of each year.
Example
1999
1/1
Cashbook
1/10 Cashbook

900
600
1,500

2000
1/1
Bal b/d
1,500

2001
1/1
Bal b/d
1/7
Cashbook
2,050

Plant a/c
1999

31/12 Bal c/d

2000
1,500

2001
1,500
550 31/12

1,500
1,500

31/12

Bal c/d

Bal c/d

2,050
2002
1/1
Bal b/d
900

2,050
2002
2,050

30/9

Disposal

Lesson Four

14

31/12

Bal c/d

1,150
2,050

2,050

Plant Provision for Depreciation a/c

1999
31/12

Bal c/d

1999
210
31/12

Bal c/d

2000
1/1
510

2000
31/12

P&L

210

Bal b/d
P&L

210
300

510
2001
31/12

510
2001
1/1
865

Bal c/d

Bal b/d
P&L

865
2002
31/12

Disposals
Bal c/d

675
1,230

510
355
865

2002
1/1
555

Bal b/d
P&L
365
1,230

865

Calculation for Depreciation

Date

Cost

Months Depreciation charge

1999
1/1
1/10

900
600

12
3

20/100 x 900 x 12/12

20/100 x 600 x 3/12

=
=
210

2000
1/1
300

1,500

12

20/100 x 1,500 x 12/12

2001
1/1
300

1,500

12

20/100 x 1,500 x 12/12

180
30

Lesson Four

1/2

15

550

20/100 x 550 x 6/12

55
355

2002
30/9
31/12
31/12

900
550
600

2002
Plant a/c
P&L

9
12
12

900
50
950

20/100 x 900 x 9/12

20/100 x 550 x 12/12
20/100 x 600 x 12/12

=
=
=
365

Plant Disposal a/c

2002

30/9
Provision for depreciation
30/9
Cashbook
275
950

135
110
120

675

Balance Sheet (Extract)

Total
Non Current Assets
1999 Plant

Cost
1,500

(210)

Depreciation
1,290

NBV

2000 Plant

1,500

(510)

990

2001 Plant

2,050

(865)

1,695

2002 Plant

1,150

(555)

595

CHANGE OF DEPRECIATION POLICY

A firm may change its depreciation policy in several ways e.g. from straight line to
reducing balance or vice versa, or it may increase/decrease the number of
estimated useful years of an asset. A firm should always follow the depreciation
policy adopted consistently and incase there is need to change the policy may be
due to a new accounting standard or change in circumstances. This change should
be disclosed in the financial statements.
When there is change in the depreciation policy this may result in an increase or a
decrease in the depreciation to be charged in the Profit and loss account .IAS 16
requires that depreciation should be based on the remaining net book value at the
start of the period.
Example 4.17
A firm buys a machine for 100,000 for which it expects to use for the next 10
years. The firm depreciates the machines on a straight-line basis on the years of
the number of estimated useful years. In the 4 th year, the estimated useful life of
the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried
down for year 4. Change for 10yr 8 yr is same as change from 10% to 12.5%

Lesson Four

16

Provision for Depreciation

Year 1
31/12

Bal c/d
10,000

Year 1
10,000

Year 2
31/12

Year 2
1/1
20,000

Bal c/d
10,000

20,000
Year 3
1/1
30,000

Year 3
31/12

Bal c/d
10,000

31/12

Bal b/d

31/12

Bal c/d

Year 4
1/1
31/12
44,000

10,000
P&L
20,000

Bal b/d
31/12

30,000
Year 4

P&L

20,000
P&L
30,000

Bal b/d
P&L

44,000

30,000
14,000
44,000

Workings:
The net book value at the beginning of Year 4 is 70,000 (100,000- 30,000). And
the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease
but increases from 10 years to 13 years.
Required: Show the provision of depreciation account in year 4

Lesson Four

17

Provision for Depreciation

Year 1
31/12

Year 1
10,000

Bal c/d
10,000

Year 2
31/12

31/12

Year 2
1/1
20,000

Bal c/d
10,000

P&L

Bal b/d

10,000
P&L

20,000
Year 3
31/12

20,000
Year 3

Bal c/d

30,000

1/1

Bal b/d

20,000
_____

P&L

10,000

30,000
30,000
Year 4

Year 4
1/1 Bal b/d

30,000
31/12
7,000

Bal c/d

37,000

31/12

P&L

37,000

37,000

REVALUATION OF NON CURRENT ASSETS

Some of the non-current assets in a firm tend to appreciate in value rather than
depreciate e.g. land and buildings. IAS 16 on property, plant and equipment
requires that such assets may be carried in the accounts at the revalued amounts
(may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but
for buildings, changes should be made at the cost and depreciation reserve
account is usually opened for the purpose of these adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset
(a)
(b)

Land
Buildings

Cost

Depreciation

1,000,000
800,000

40,000

Lesson Four

18

Illustration 1
The firm decides to revalue these two assets to reflect their current market prices
and these are revalued at:
Land
- 1,200,00
Buildings - 900,000
The following entries would be made
(a) Debit Land A/c with revaluation gain - 200,000
Credit Revaluation Reserve a/c with the same - 200,000
(Revaluation gain on the land

1,200,000 1,000,000)

(b) Debit Building a/c with revaluation gain - 100,000

Credit Revaluation Reserve a/c with the same - 100,000
(Revaluation gain on buildings
(c)

900,000 800,000)

Debit Provision for depreciation for buildings a/c with 40,000

Credit Revaluation Reserve a/c with the same 40,000

Total credit depreciation charged to date on buildings now transferred to

revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c

Bal B/D
Revaluation
reserve

1,000,000
__200,000

Bal C/D

1,2000,00
0

1,200,000
1,200,000

Buildings a/c

Bal B/D

800,000

Revaluation
reserve

100,000

Bal C/D

900,000
Revaluation Reserve a/c

900,000
900,000

Lesson Four

19

Bal C/D

340,000

Land

200,000

Buildings

100,000

Provision for depr.

340,000

40,000
340,000

Provision for depreciation (Buildings)

Revaluation

40,000

Bal B/D

40,000

Bal c/d

45,000

P&L

45,000

85,000

85,000

The balances in the Land and Building a/c will be shown as cost in the
Balance Sheet and the revaluation reserve a/c appears together with the
capital as a revaluation reserve (especially used in company accounts.
Land
Buildings

1,200,000 1,000,000 = 200,000

900,000 760,000 = 140,000

340,000

Any depreciation to be charged for the buildings should be based on the

revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have 45,000
charged in the P & L and will also be the Bal c/d in the provision for
depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land
and buildings downwards in year 3 to the following values:
Land : 900,000
Buildings: 700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Land
Year 3

Year 3

Lesson Four

20

1/1 Bal B/D

1,200,000

31/12 Revaluation

200,000

P&L

100,000

________

Bal C/D

__900,000

1,200,000

1,200,000

Buildings
Year 3
1/1 Bal B/D

900,000

_______

Year 3

31/12
Revaluation

100,000

P&L

100,000

Bal C/D

700,000

900,000

900,000

Revaluation Reserve
Year 3

Year 3
1/1/ Bal B/D

31/12 Land

200,000

340,000

31/12 Building

100,000

31/12 Prov. For depr.

_40,000

_______

340,000

340,000

Exam Type Question 4.19 (December 1995 ) Question 4

James Mbuvi started a taxi business in Nairobi March 1990 under the firm name
Mbuvi Taxis. The firm had two vehicles KA and KB, which had been purchased
forSh.560, 000, and Sh.720, 000 respectively earlier in the year.
In February 1992 vehicle KB was involved in an accident and was written off. The
insurance company paid the firm Sh.160, 000 for the vehicle. In the same year the
firm purchased two vehicles, KC and KD for Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle
KE was purchased for Shs.840,000. In March 1994 another vehicle KF was

Lesson Four

21

purchased for
Sh.960, 000.
The firms policy is to depreciate vehicles at the rate of 25 per cent on cost on
vehicles on hand at the end of the year irrespective of the date of purchase.
Depreciation is not provided for vehicle disposed of during the year. The firms
year ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss
account for each of the five years.
(7 marks)
b)

Prepare the motor vehicle account (at cost).

(8 marks)

c) Calculate the profit and loss on disposal of each of the vehicles disposed
of by the company.
(5 marks)
(Total: 20 marks)

a
Vehicle

1990

1991

1992

1993

KA

560,000

560,000

560,000

560,000

KB

720000

720,000

KC

800,000

KD

800,000

800,000

800,000

KE

840,000

KF

960,000

Total cost

1,280,00
0

1,280,00
0

2,160,00
0

1,360,00
0

2,600,00
0

320,00
0

320,00
0

540,00
0

340,00
0

650,00
0

Depreciation at
25%

Motor Vehicle
1990
1/3

Sh
Cashbook

1,280,00
0

1990
31/12

Sh
Bal c/d

1,280,000

1994

Lesson Four

22

1991
1/1

1991
Bal b/d

1,280,00
0

1992
1/1

31/12

Bal c/d

1992
bal b/d

1,280,00
0

1/2

Disposal

Cashbook

1,600,00
0

31/12

Bal c/d

2,880,00
0
1993
1/1

1,280,000

720,000
2,160,000
2,880,000

1993
Bal b/d

2,160,00
0

1/11

Disposal

________

31/12

Bal c/d

2,160,00
0
1994

800,000
1,360,000
2,160,000

1994

1/1

Bal b/d

1,360,00
0

1/1

Cashbook

840,000

1/3

Cashbook

960,000
3,160,00

31/12

Bal c/d

3,160,000
3,160,000

Lesson Four

23

Provision For Depreciation M/V

1990
31/12

Sh
Balc/d

320,000

1991

1990
31/12

Sh
P&L

320,000

1/1

Bal b/d

320,000

31/12

P& L

320,000

1991

1992
31/12

Bal c/d

640,000
640,000

1992

640,000
1992

1/2

Disposal

360,000

1/1

Bal b/d

640,000

31/12

Bal c/d

820,000

3/12

P&L

540,000

1,180,00
0
1993

1,180,000
1993

1/11

Disposal

200,000

1/1

Bal b/d

820,000

31/12

Bal c/

960,000

31/12

P&L

340,000

1,160,00
0
1994

1,1
60,000
1994
31/1

31/12

Bal c/d

1,610,00
0
1,610,00
0

Bal b/d

960,000

P&L

650,000
1,610,000

Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost
still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each
year.
At 1 July 1999 the companys balance sheet included the following figures:
l

Lesson Four

24

Accumulate
d

Net book

Depreciatio
n

Value

000

000

000

Land

4,000

Nil

4,000

Buildings

2,200

800

1,400

Plant and
machinery

1,600

600

1,000

600

200

400

Cost

Motor vehicles

Depreciation is charged at the following annual rates (all straight line):

Land

Nil

Buildings

2%

Plant and machinery

Motor vehicles

15%

20%

Appropriate depreciation charge is made in the year of purchase, sale or

revaluation of an asset
During the year ended 30 June 2000 the following transactions took place:
1. I January 2000
The company decided to adopt a policy of revaluing its
buildings; and they were revalued to 3.4m.
2. 1 January 2000 Plant which has cost 300,000 was sold for 50,000.
Accumulated depreciation on this plant at 30 June 1999 amounted to
230,000.New plant was purchased at a cost of 400,000.
3. 1 April 2000 A new motor vehicle was purchased for 30,000. part of the
purchase price was settled by part exchanging another motor vehicle, which
had cost 20,000, at an agreed value of 12,000. the balance of 18,000 was
paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less
depreciation) at 30 June 1999 of 10,000
Required:
Prepare ledger accounts to record these transactions in the records of Pentland
Limited.
(16 marks)
Land
1999

1999

Lesson Four

1/7

25

Bal b/d

4,000

2000
1/1

2000
Revaluation

1,200

30/6

Bal c/d

5,200

5,200

1999
1/7
2000
1/1

Bal b/d
Revaluation

2000
30/6

Bal C/D

30/6

1999
1/7

Buildings
1999
2,200
1,200
3,400

2000
30/6

Bal c/d

3,400
3,400

Revaluation Reserve
2000
1/1
Buildings
2,022 1/1
Provision for
depr.
2,022

1,200
822
2,022

Provision for Depreciation - Building

1999

1/7
Bal b/d
800

1999
2000
1/1

5,200

Revaluation

Bal c/d

Bal B/D

82
2

2000
30/6

34
_
85
6

Plant
1999
1,600

P&L
2,200 x x
15
3,400 x x
15

56_
856

Lesson Four

2000
1/1

26

Cashbook

Disposal
Bal c/d

1999
1/7
Bal b/d

1/4
1/4

2000
1/4

2000
Disposal
Cash book

Motor Vehicle
P&L

2000
1/1
P&L

Disposal
Bal c/d

300
1,700
2,000

252.50
595.00
847.50

2000
30/6

P&L

Motor Vehicles

1999
600

12
18
630

Disposal
Bal c/d

1/4
30/6

2000
Disposal
Bal C/D

Motor Vehicle Disposal

2000
20 1/4 Provision for
depr.
5 1/4 Motor Vehicle
25

Plant

13
307.5
320.50

600
247.50
847.50

Provision for depreciation - Vehicle

1999
1/7
Bal b/d

1999
2000
1/4
30/6

2000
1/1
30/6

Provision for Depreciation - Plant

1999
1/7
Bal b/d

1999
2000
1/1

400
_____
2,000

2000
1/4
30/6

P&L
Bal C/D

Plant - Disposal
2000
300 1/1 Provision for
depr.
2.50 Cash book

20
610
630

13
12
25

200
120.5
______
320.50

252.50
50___

Lesson Four

27

25

302.50

Property, Plant and Equipment Schedule (Formerly fixed asset movement

schedule)
The property, plant and equipment schedule is a summary report on the balances
and transactions of the asset and provision for depreciation account as per the
requirements of IAS 16 to be reported in the published accounts of companies.
The format is as follows:

Lesson Four

Cost/
Valuation

28

Property, Plant and Equipment Schedule:

Freehold
Leasehold Property
Plant
Fixture,
property
and
Furniture
()

Bal as at
1/1/01
Additions
Revaluations
(gains)
Reclassificati
ons
Disposals
Bal as at
31/12/01
Depreciation
/
Amortization
Bal as at
1/1/10
Change for
year
Revaluation
Eliminated
on Disposal
Bal as at
31/12/01
N.B. V as at
31/12/01
NBV as at
31/12/01

Total

Short
lease
()
x

Machine
ry ()

And fittings
()

()

Long
leases
()
x

xx
xx

xx
-

xx
-

xx
-

xx
-

xx
xx

(xx)

xx

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)

(xx)
xx

xx

(xx)
xx

(xx)
xx

(xx)
xx

(xx)
xx

xx

xx

xx

xx

xx

xx

Additional information is in this schedule called reclassifications where some of the

non-current assets are transferred into a different class. (e.g.) some of the
properties hold under long leases (over 50 years) will be transferred to the short
leases classes when their term becomes less than 50 years. This is a
reclassification from long lease to short lease and so is shown in the schedule at
the value of transfer as a deduction in the long lease class and on addition in the
short lease class
Exam Type Questions
May 2000 Question Three
a)

Briefly explain the nature and purpose of accounting for depreciation.

Lesson Four

b)

29

The chief accountant of Jitegemea Ltd has encountered difficulties while

accounting for fixed assets and the related depreciation in the companys draft
accounts for the year ended 30 April 2000. He has decided to seek your
professional advice and presented the following balances of fixed assets as at 1
May 1999:

Lesson Four

Furniture
Trucks
Plant and machinery
Land
Buildings

30

Acquisition

Accumulated

Cost
Sh.
900,000
3,525,000
7,387,500
2,775,000
2,925,000

Depreciation
Sh.
300,000
1,470,000
4,462,500
292,500

Depreciatio
n
Rates
%
12.5
25
10
Nil
2.5

The following additional information was also available:

1. It is the companys policy to write off cost of the assets using above
percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year
of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5.
A used delivery truck purchased three years ago for sh.248,250 was traded
in during the year at a value of sh.157,500 in part exchange of the new delivery
truck costing sh.450,000.
6.
Land, buildings and machinery were acquired for sh.1,350,000 from a
company that went out of business. At the time of acquisition sh.90,000 was
paid to have the assets revalued by a professionally qualified valuer. The
revaluation indicated the following market values.
Sh.
Land
900,000
Buildings
600,000
Machinery
300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for
inclusion in the companys accounts for the year ended 30 April 2000.
(10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of
use by the firm. IAS 16 on property plant and equipment defines depreciation as
allocation of a depreciable amount of a non-current asset throughout its useful
life.
Under the matching concept, all revenues should be matched with all the expenses
that relate to a particular financial period and therefore because the firm to earn
revenue or income uses the assets, then the loss of value should be marched with
these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the
non-current asset.

Lesson Four

31

Property, Plant & Equipment Schedule:

Cost/Valuation
Land,
Furniture
Buildings
And
Machinery
Sh.
Sh.
Bal as at 1/5/99
13,087,5
900,000
00
Additions
1,350,000
Revaluation
450,000
Disposals
(187500)
_____Bal as at 30/4/2000
14,700,000
900,000
Depreciation
Bal as at 1/5/99
Charge for the
year
Eliminated on
disposal
Bal as at 30/4/2000

Total

Sh.
3,225,000

Sh.
17,512,500

450,000
(248,250)
3,726,750

1,800,000
450,000
(435,750)
19,326,750

300,000
112,500

1,470,000
931,687.5

6,525,000
2,110,687.5

-______

(124,125)

(161,625)

5,784,000

412,500

8,474,062.5

8,332,500
8,916,000

600,000
487,500

2,277,562.
5
2,055,000
1,449,187.
5

4,755,000
1,066,500
(37,500)

NBV 1/5/99
NBV 30/4/2000

Motor

10,987,500
10852,687.
8

Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle

= cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5

Buildings

At 2.5%
4%

= (292,500 + 600,000) x 4%
= 141,000
= 2,925,000 x 2.5% x 4 = 292,500
= 292,500 x 4% x 4
= 468,000
175,500

Machinery: cost

c/f + Additions Disposals = Bal x 10%

73,787,500 + 300,000 (187,500) = 7,500,000 x 10%

= 750,000

Lesson Four

32

Lesson Four

33

REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and
purchases ledgers. The control accounts for the month of September 1999 are in
balance and incorporate the following totals:

Sales ledger:
Balances at 1 September
1999: Debit

386,430
190

Credit
Sales
Cash received
Discounts allowed
Sales returns inwards
Credit balances at 30
September 1999
Purchases ledger:
Balances at 1 September
1999: Credit

163,194
158,288
2,160
590
370
184,740
520

Debit
Purchases
Cash payments
Discounts received
Purchases returns outwards
Debit balances at 30
September 1999

98,192
103,040
990
1,370
520

Although the control accounts agree with the underlying ledgers, a number of
errors have been found, and there are also several adjustments to be made. These
errors and adjustments are detailed below:
1. Four sales invoices totaling 1,386 have been omitted from the records.
2. A cash refund of 350 paid to a customer, A Smith, was mistakenly treated
as a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of 870 due to a supplier against
the sales ledger account for the same company is to be made.
4. Bad debts totaling 1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed
account. As a result, the supplier issued a credit note for 2,000 on 26
September. No entry has yet been made for this.
6. A purchases invoice for 1,395 was keyed in as 1,359.
7. A payment of 2,130 to a supplier, B Jones, was mistakenly entered to the
account of R Jones.

Lesson Four

34

8. A debit balance of 420 existed in the purchases ledger at the end of August
1999. The supplier concerned cannot now be traced and it has been decided
to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should
appear after allowing, where necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its
debtor collection system, the company maintains a sales ledger control account. In
preparing the accounts for the year to 31 October 20X3 the accountant discovers
that the total of all the personal accounts in the sales ledger amounts to 12,802,
whereas the balance on the sales ledger control account is 12,550.
Upon investigating the matter, the following errors were discovered:
1. Sales for the week ending 27 March 20X3 amounting to 850 had been
omitted from the control account.
2. A debtors account balance of 300 had not been included in the list of
balances.
3. Cash received of 750 had been entered in a personal account as 570.
4. Discounts allowed totaling 100 had not been entered in the control
account.
5. A personal account balance had been undercast by 200.
6. A contra item of 400 with the purchase ledger had not been entered in the
control account.
7. A bad debt of 500 had not been entered in the control account.
8. Cash received of 250 had been debited to a personal account.
9. Discounts received of 50 had been debited to Bells sales ledger account.
10.Returns inwards valued at 200 had not been included in the control
account.
11.Cash received of 80 had been credited to a personal account as 8.
12.A cheque for 300 received from a customer had been dishonored by the
bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended
balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of
personal account balances so that it reconciles with the amended sales ledger
control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999,
which showed a profit of 81,208, when he realized that no bank reconciliation
statement had been prepared at that date.

Lesson Four

35

When checking the cashbook against the bank statement and carrying out other
checks, he found the following:
1. A cheque for 1,000 had been entered in the cashbook but had not yet been
presented.
2. Cheques from customers totaling 2,890 entered in the cashbook on 31
March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of 320 appear in the bank statement on 30 March 1999 but
have not been recoded by George.
4. A cheque for 12,900 drawn by George to pay for a new item of plant had
been mistakenly entered in the cash book and the plant account as 2,900.
Depreciation of 290 had been charged in the profit and loss account for this
plant.
5. A cheque for 980 from a credit customer paid in on 26 March was
dishonoured after 31 March and George decided that the debt would have to
be written off as the customer was now untraceable.
6. A cheque for 2,400 in payment for some motor repairs had mistakenly been
entered in the cash book as a debit and posted to the credit of motor
vehicles account. Depreciation at 25% per annum (straight line) is charged
on motor vehicles, with a full years charge calculated on the balance at the
end of each year.
7. The total of the payments side of the cash book had been understated by
1,000. On further investigation it was found that the debit side of the
purchases account had also been understated by 1,000.
George had instructed his bank to credit the interest of 160 on the deposit
account maintained for surplus business funds to the current account. This the
bank had done on 28 March. George had made an entry on the payments side of
the cashbook for this 160 and had posted it to the debit of interest payable
account.
George had mistakenly paid an account for 870 for repairs to his house with a
cheque drawn on the business account. The entry in the cashbook had been
debited to repairs to premises account.
George had also mistakenly paid 540 to Paul, a trade supplier, to clear his account
in the purchases ledger, using a cheque drawn on Georges personal bank account.
No entries have yet been made for this transaction.
The cashbook showed a debit balance of 4,890 before any correcting entries had
been made. The balance in the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should
appear in Georges balance sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999.
(2
marks)
3. Draw up a statement for George showing the effect on his profit of the
adjustments necessary to correct the errors found.

Lesson Four

36

(8
marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are
required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial
balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995.
The difference was put in the suspense account. The final accounts which
were then prepared showed a net profit of Sh. 64,000. During audit, the
following errors were noted:

A loan from ABD Bank of Sh 10,000 was entered correctly in cash

book but was not posted to the ledger.
A cheque of Sh. 4,000 for rent was not entered in the books.
Closing stock was overvalued by Sh 1,500.
Discount allowed of Sh 500 was entered in the discount-received
account.
The opening stock was understated by Sh 3,200.
Prepaid insurance of Sh 220 had been included in the profit and loss
account.
Goods destroyed by fire amounting to Sh 12,000 were written off in
the profit and loss account. However, the insurance company has
agreed to compensate the full amount.

Required:
1.
2.
3.

Journal entries to correct the errors.

Statement of corrected profit.
Suspense account.

(8 marks)
(2 marks)
(2 marks)
(Total: 20 marks)

QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on
31st December 2002:

Capital
Purchases
Sales
Salaries

40,000

26,154
36,246
4,814

Lesson Four

Opening stock
Insurance
Rent
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission

37

4,307
820
965
25,000
14,500
6,140
1,060
_____
82,795

4,638
__946
82,795

Adjustments:
1.
2.
3.
4.
5.
6.
7.

Salaries due, 350

Insurance was paid for one year up to 31st March 19-2.
Rent received for January 19-2, 165.
Commission accrued but not yet received, 120.
Furniture to be depreciated by 10%.
5% of debtors are doubtful.
Stock on 31st December 19-1 was valued at 5,008.

Required:
Prepare a 10 column worksheet.

QUESTION SIX
1.

Explain the purposes for which control accounts are prepared in a business
organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and
transactions relating to the companys control accounts for the month of December
1994 are listed below:
Balance at 1 December 1994:
Sales ledger
Purchases ledger
Transactions during December
1994:
Sales on credit
Purchases on credit

6,185,0
00
52,500
16,500
4,285,0
00
8,452,0
00
5,687,5
00

(debit)
(credit)
(debit)
(credit)

Lesson Four

Returns inwards
Returns outwards
Bills of exchange payable
Bills of exchange receivable
Cheques received from
customers
Cheques paid to suppliers
Cash paid to suppliers
Bill payable dishonoured
Charges on bill payable
dishounered
Cash received from credit
customers
Bad debts written off
Cash discounts allowed

38

203,50
0
284,00
0
930,00
0
615,00
0
7,985,0
00
4,732,0
00
88,500
400,00
0
10,000

Bill receivable dishonoured

153,00
0
64,500
302,00
0
88,500

Balances at 31 December 1994:

Sales ledger
Purchases ledger

44,000 (credit)
23,500 (debit)

Required:
Post the sales ledger and the purchases ledger control accounts for the month of
December 1994 and derive the respective debit and credit closing balances on 31
December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK

Lesson Four

39

Lesson Four

40