Directorate: Curriculum FET

Gr 10 Accounting Term 2, 2020 1

GRADE 10 ACCOUNTING TERM 2 : WEEK 7

TOPIC : Depreciation; Adjustments; Pre- & Post Adjustment Trial Balance

You already know about …

basic accounting concepts e.g. income, expenses, profit and loss | GAAP principles |

year-end adjustments | journal entries | trial balance

This lesson will improve your knowledge and skills about ...

depreciation | historic cost principle | pre- and post- adjustment trial balances

Note: For more information please refer to your TEXT BOOK about DEPRECIATION and pre-

and post-adjustment trial balances OR refer to the following digital resources:

Lucem Publishers Gr 10 Teachers Guide (text book & workbook in one) bit.ly/Gr10LucemAE (Pg. 134 – 152)

Via Africa Gr 10 Study Guide

(Eng only)

http://bit.ly/Gr10Via

Gr 10 Study& Master videos on the General Journal / Adjustments

Gr10S&M K&V

CONCEPTS RELATED TO DEPRECIATION

Fixed Assets are valuable items used to generate income

over a long period (1 year+), e.g. Vehicles, Equipment

P = Cost of obtaining the asset (original (historic) cost price)

S = Salvage or replacement value after a number of years

n = Life span of the asset (no. of years the asset will be useful)

o Fixed assets decrease in value over time due to wear

and tear.

Depreciation = the decrease in value over time

o is calculated annually at the end of a financial year and

o written off annually against the value of the asset as an

'expense' in a specific accounting period.

Accumulated depreciation = the total depreciation

expense written off over the life span of the asset

o Each asset item has an 'accumulated depreciation' total

to be offset against the historic cost of the asset in the

balance sheet.

o It is a negative asset as it decreases the value of the

asset item.

Carrying value (book value) is the 'net' value of the asset,

i.e. Cost price - Accumulated Depreciation.

Basic example:

Vehicle Cost R100 000

Depreciation per year: R10 000 p.a.

Vehicle's carrying value after 5 years:

100 000 - (5 x 10 000)

= R50 000

R50 000 can also be the 'salvage' / replace-

ment value if the vehicle needs to be replaced

by a more economical/useful vehicle.

Gr 10 Accounting Term 2, 2020 2

DEPRECIATION METHODS (at school level)

Fixed amount method

(on cost price)

OR

Straight line method

OR

Fixed Instalment method

A fixed amount OR a fixed percentage of the cost price is written

off annually during the life span of the asset.

The depreciation amount is the same every year over the useful life

of the asset.

Accumulated depreciation will increase every year with the same

amount.

The useful life span of some assets are relatively short and they may

lose value 'quickly' over time, e.g. Computers (quick technological

advances may result in a large drop in value over a short period)

Diminishing balance

method (on carrying value)

OR

% of Carrying / Book value

Depreciation is calculated on the diminishing balance (carrying value)

of the asset.

The depreciation amount will decrease every year.

Accumulated depreciation will increase every year with a smaller

amount.

The depreciation amount on one asset item will initially be high, but

will gradually decrease.

The useful life span of the asset is relatively longer and will drop in

value over a longer period, e.g. Equipment (the value of office desks

and chairs will decrease at a 'slower' pace (low wear and tear) and can

be used for a long time)

EXAMPLES for applying the two depreciation methods

1. Cost price / Straight line / Fixed installment method

Year Cost price Depreciation

Rate(%)

Depreciation

(R) Calculation

Accumulated

Depreciation

Carrying

value

2017 R200 000 20% R40 000 R200 000 x 20% R 40 000 R160 000

2018 R200 000 20% R40 000 R200 000 x 20% R 80 000 R120 000

2019 R200 000 20% R40 000 R200 000 x 20% R120 000 R 80 000

2. Diminishing balance / Carrying value / Book value method

Year Cost price Depreciation

Rate(%)

Depreciation

(R) Calculation

Accumulated

Depreciation

Carrying

value

2017 R200 000 20% R40 000 R200 000 x 20% R 40 000 R160 000

2018 R200 000 20% R32 000 R160 000 x 20% R 72 000 R128 000

2019 R200 000 20% R25 600 R128 000 x 20 % R 97 600 R102 400

Internal control measures for fixed assets

Physical safeguarding of assets, e.g. lock up facilities, security measures such as alarms, etc.

Proper authorisation required for acquisition and use of fixed assets

Detailed records of fixed assets and their use should be maintained – fixed asset register

These records to be checked periodically by physical inventory count or inspection

Lost, stolen, or destroyed items must be reported immediately and written off - keep records updated

Depreciation policies must be established and documented, especially the method to be applied

Any movements of fixed assets should be recorded promptly in the appropriate journal

New vehicle! Replacement value?

Depreciation

Gr 10 Accounting Term 2, 2020 3

DEPRECIATION ENTRIES AT THE END OF A YEAR (ADJUSTMENT)

PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2019

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

Vehicles 420 000

Equipment 86 000

Accumulated depreciation on vehicles 105 000

Accumulated depreciation on equipment 12 900

Adjustment: Provide for depreciation as follows:

on vehicles at 25 % on the cost price

on equipment at 15 % on the diminishing balance

Calculation :

Vehicles Equipment

R420 000 x 25 % x 1yr = R105 000 (R86 000 – R 12 900) x 15 % x 1yr = R10 965

Accounts to be adjusted:

Dr Depreciation (expense) with R115 965 (R105 000 + R10 965)

Cr Accumulated depreciation on vehicles (negative assets) with R105 000 and

Cr Accumulated depreciation on equipment (negative assets) with R10 965

General Journal on 30 June 2019 Fol Debit Credit

Depreciation 115 965

Accumulated depreciation on vehicles 105 000

Accumulated depreciation on equipment 10 965

General Ledger

Dr Vehicles ( B) Cr

2019 June

30 Balance b/d 420 000

Equipment (B)

2019 June

30 Balance b/d 86 000

Accumulated depreciation on vehicles (B)

2019 June

30 Balance c/d 210 000 2018 July

1 Balance b/d 105 000

2019 June

30 Depreciation GJ 105 000

210 000 210 000

2019 July

1 Balance b/d 210 000

Accumulated depreciation on equipment (B)

2019 June

30 Balance c/d 23 865 2018 July

1 Balance b/d 12 900

2019 June

30 Depreciation GJ 10 965

23 865 23 865

2019 July

1 Balance b/d 23 865

Depreciation (N)

2019 June

30 Accumulated depr. on vehicles

GJ 105 000

Accumulated depr. on equipment

GJ 10 965

115 965

Gr 10 Accounting Term 2, 2020 4

POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2019

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

Vehicles 420 000

Equipment 86 000

Accumulated depreciation on vehicles 210 000

Accumulated depreciation on equipment 23 865

NOMINAL ACCOUNTS SECTION

Depreciation 115 965

NOTE: When an asset is purchased during the financial year, depreciation must be written off on a pro rata basis for the financial period i.e. for the period from when it was purchased until the end of the financial period.

Example: A business’s financial year starts on 1 March 2019 and ends on 29 February 2020. Equipment, R48 000 was purchased on 1 October 2019. Equipment is depreciated at 15% p.a. on cost. Calculation :

R48 000 x 15 % x 5/12 = R 3 000 TIMELINE FOR THE FINANCIAL YEAR

Mar 2019

Apr May June July Aug Sep Oct Nov Dec Jan Feb 2020

5 months

ACTIVITY 1

The information provided below relates to Giant Stores for their FIRST financial year ended 29 February 2020. REQUIRED:

1.1 Show the General Ledger entries on 29 February 2020. 1.2 Show the extract of the Post adjustment trial balance on 29 February 2020.

Extract from the Pre-Adjustment Trial Balance on 29 February 2020

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

Vehicles 162 720

Equipment 29 520

Additional information:

A. A new vehicle was purchased for R162 720 cash on 30 November 2019 and properly recorded.

B. New equipment was purchased on credit on 1 July 2019, R29 520 and correctly entered.

C. Provide for depreciation as follows:

on vehicles at 20 % on the diminishing balance method

on equipment at 10 % on cost

NOTE: The first depreciation provided on a new asset using the diminishing balance method will be calculated in the same way as 'on cost' as there is no 'accumulated' depreciation from previous years to deduct first.

ALWAYS use a timeline in Depreciation calculations

Gr 10 Accounting Term 2, 2020 5

ACTIVITY 1: ANSWER SHEET (Show calculations for depreciation - always!!)

Vehicles New Answer

Equipment New

Answer

1.1 General Ledger

Dr Vehicles Cr

Equipment

Accumulated depreciation on vehicles

Accumulated depreciation on equipment

Depreciation

1.2 Extract from the Post-Adjustment Trial Balance on 29 February 2020

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

NOMINAL ACCOUNTS SECTION

Gr 10 Accounting Term 2, 2020 6

ACTIVITY 2

REQUIRED: 2.1 Calculate the depreciation to be written off on vehicles and equipment for the financial year ended

29 February 2020.(Remember to use a time line to help you determine the months for pro rata depreciation.)

2.2 Which GAAP principle is applied when assets are depreciated at the end of the financial year? Explain your answer. INFORMATION On 1 March 2019 the following balances appear in the books of Robyn Traders

Extract from the Pre-adjustment Trial Balance on 29 February 2020

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

Vehicles 540 000

Equipment 342 000

Accumulated depreciation on vehicles 135 000

Accumulated depreciation on equipment 123 120

ADJUSTMENTS AND ADDITIONAL INFORMATION 1. During the financial year, a new vehicle and new equipment were purchased by cheque. The following

information relates to the transactions: Details Date purchased Cost price

Vehicles 1 May 2019 R216 000

Equipment 1 January 2020 R81 000

2. Depreciation must be written off as follows:

on vehicles at 15 % on cost.

on equipment at 20 % on diminishing balance method.

ACTIVITY 2: ANSWER SHEET

2.1 Calculations: Total

Vehicles Old :

New:

Equipment Old :

New:

2.2

Gr 10 Accounting Term 2, 2020 7

ACTIVITY 3

REQUIRED : Use the information below to complete the Adjustment and Post-Adjustment columns in the Answer sheet.

INFORMATION

The following balances appear in the books of Larah Traders

Extract from the Pre-adjustment Trial Balance on 29 February 2020

BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT

Capital 172 000

Vehicles 300 000

Equipment 53 000

Accumulated depreciation on vehicles 52 800

Accumulated depreciation on equipment 13 000

Trading stock 62 880

Debtors’ control 35 160

NOMINAL ACCOUNTS SECTION

Stationery 4 900

Bad debts 3 200

Adjustments: A. According to a physical stock take on 29 February 2020, the following were on hand :

Trading stock R59 240

Stationery R 240

B. C.Mnisi , a debtor who owed the business R 3 800 was declared insolvent. The business received a cheque for 40c in the rand from his insolvent estate. This has been properly recorded. The balance of his account must be written off as irrecoverable.

C. Depreciation for the year is as follows:

Vehicles at 20 % per annum on the diminishing balance method. A vehicle with as cost price of R 80 000 was purchased on 1 September 2019 and was recorded correctly.

Equipment at 10 % per annum on the cost price. The owner contributed additional equipment of R 28 000 on 1 March 2019. This was the only additional capital contribution, but the transaction was not recorded.

ACTIVITY 3: ANSWER SHEET

Pre-adjustment Trial Balance

Adjustments Post- Adjustment

Trial Balance

Debit Credit Debit Credit Debit Credit

Balance sheet section

Capital 172 000

Vehicles 300 000

Equipment 53 000

Acc. depr. on vehicles 52 800

Acc. depr. on equipment 13 000

Trading stock 62 880

Debtors’ control 35 160

Nominal section

Stationery 4 900

Bad debts 3 200