Subject: Other
Depreciation is a permanent, continuous and gradual decline in the value of fixed assets due to wear and tear or passage of time. It is treated as an expense or loss. It is a non-cash revenue expense and charged in profit and loss account. It is quality, quantity or value deterioration of fixed assets because of their constant use.
“Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset.” – William Pickles
“The allocation of the original cost of plant, property and equipment to the particular periods or products that benefit from the utilization of assets.” – C.T. Horngren
From the above definition, it is apparent that depreciation is the constant reduction in the value of fixed assets possessed by the business due to their constant use.
Depreciation is the fall or decrease in the value of fixed assets. The following are the main causes of depreciation:
The need for providing depreciation arises due to the following reasons:
V/S Auto Piston Ltd. Purchased a plant on 1st Jan, 1995 at a cost on Rs.8,000 and spent 2,000 for its erection. The firm writes off depreciation on 31st December of each year at 20% p.a. on the original cost method. The plant was sold for Rs.5,500 on 30th June, 1997.
Required: Plant account
Solution:
Dr. | Machinery a/c | Cr. |
Date | Particulars | Amount | Date | Particulars | Amount |
1995-1-1 | To bank a/c | 10,000 | 1995-12-31 | By depreciation a/c | 2,000 |
By balance c/d | 8,000 | ||||
10,000 | 10,000 | ||||
1996-1-1 | To balance b/d | 8,000 | 1996-12-31 | By depreciation a/c | 2,000 |
By balance c/d | 6,000 | ||||
8,000 | 8,000 | ||||
1997-1-1 | To balance b/d | 6,000 | 1997-12-31 | By depreciation a/c | 1,000 |
To gain on sales | 500 | By bank a/c | 5,500 | ||
6,500 | 6,500 | ||||
Consider the following information:
Date |
Transactions |
2009-01-01 |
Purchased machinery for Rs.50,000 |
2011-07-01 |
Sold the machinery for Rs.40,000 which was purchased on 2009 |
2011-12-31 |
Purchased new machinery for Rs.50,000 |
Assuming the rate of depreciation is @ 10% on straight line method and accounts are closed on 31st December of each year.
Required: Machinery account for the first three years.
Solution:
Dr. | Machinery a/c | Cr. |
Date | Particulars | Amount | Date | Particulars | Amount |
2009-01-01 | To Bank a/c | 50,000 | 2009-12-31 | By depreciation | 5,000 |
By balance c/d | 45,000 | ||||
50,000 | 50,000 | ||||
2010-01-01 | To balance b/d | 45,000 | 2010-12-31 | By depreciation | 5,000 |
By balance c/d | 40,000 | ||||
45,000 | 45,000 | ||||
2011-01-01 | To balance b/d | 40,000 | 2011-12-31 | By bank a/c | 40,000 |
To bank a/c | 50,000 | By depreciation of sold machine | 2,500 | ||
To profit on sales | 2,500 | By balance c/d | 50,000 | ||
92,500 | 92,500 | ||||
2012-01-01 | To balance b/d | 50,000 |
EP12
Consider the following information:
Date |
Transactions |
2009-01-01 |
Purchased first machinery for Rs.80,000 |
2010-07-01 |
Purchased second machinery for Rs.60,000 |
2011-10-01 |
Purchased third machinery for Rs.1,20,000 |
Assume the rate of depreciation is @ 105 on diminishing balance method and are closed on 31st December of each year.
Required: Machinery account for the first 3 years.
Solution:
Dr. | Machinery a/c | Cr. |
Date | Particulars | Amount | Date | Particulars | Amount |
2009-01-01 | To bank a/c | 80,000 | 2009-12-31 | By depreciation a/c | 8,000 |
By balance c/d | 72,000 | ||||
80,000 | 80,000 | ||||
2010-01-01 | To balance b/d | 72,000 | 2010-12-31 | By depreciation a/c | 10,200 |
To bank a/c | 60,000 | By balance c/d | 1,21,800 | ||
1,32,000 | 1,32,000 | ||||
2011-01-01 | To balance b/d | 1,21,800 | 2011-12-31 | By depreciation a/c | 12,180 |
To bank a/c | 1,20,000 | By balance c/d | 2,26,620 | ||
2,41,800 | 2,41,800 | ||||
2012-01-01 | To balance b/d | 2,26,620 |
Pramesh purchased machinery on 1st July, 2003 at a cost of Rs.78,000 and spent rs.2,000 on its installation. The firm writes off depreciation on 31st December each year at 20% per annum on the written down value method. The machinery was sold for Rs.32,000 on 1st October,2006. Prepare the machinery account from 2003 to 2006.
Solution:
Dr. | Machinery a/c | Cr. |
Date | Particulars | Amount | Date | Particulars | Amount |
2003-07-01 | By bank a/c | 80,000 | 2003-12-31 | By depreciation a/c | 8,000 |
By balance c/d | 72,000 | ||||
80,000 | 80,000 | ||||
2004-07-01 | To balance b/d | 72,000 | 2004-12-31 | By depreciation a/c | 14,400 |
By balance c/d | 57,600 | ||||
72,000 | 72,000 | ||||
2005-07-01 | To balance b/d | 57,600 | 2005-12-31 | By depreciation a/c | 11,520 |
By balance c/d | 46,080 | ||||
57,600 | 57,600 | ||||
2006-07-01 | To balance b/d | 46,080 | 2006-12-31 | By depreciation a/c | 6,912 |
By bank a/c | 32,000 | ||||
By balance c/d | 7,168 | ||||
46080 | 46080 | ||||
Consider the following information:
Date |
Transactions |
2008-01-01 |
Purchased machinery for Rs.50,000 |
2010-07-01 |
Sold the machinery for Rs.50,000 |
2010-12-31 |
Purchased new machinery for Rs.50,000 |
Assuming the rate of depreciation is @ 10% on written down value method and accounts are closed on 31st December of each year.
Required: Machinery account for the first three years.
Solution:
Dr. | Machinery a/c | Cr. |
Date | Particulars | Amount | Date | Particulars | Amount |
1995-01-01 | To bank a/c | 45,000 | 1995-12-31 | By depreciation a/c | 4,500 |
By balance c/d | 40,500 | ||||
45,000 | 45,000 | ||||
1996-01-01 | To balance b/d | 40,500 | 1996-12-31 | By depreciation a/c | 10,050 |
By balance c/d | 90,450 | ||||
1,00,500 | 1,00,500 | ||||
1997-01-01 | To balance b/d | 90,450 | 1997-12-31 | By bank a/c | 22,000 |
By depreciation a/c | 9,045 | ||||
By profit and loss a/c | 10,085 | ||||
By balance c/d | 48,600 | ||||
90,450 | 90,450 | ||||
1998-01-01 | To balance b/d | 48,600 |
© 2019-20 Kullabs. All Rights Reserved.