Reducing Balance Depreciation

As time passes, the economic benefits of non-current assets will be used up

or consumed by the business.

Sundry Creditors

• Non-current assets are expensive.• Buying them on credit is like having a short

term interest free loan.• But they are not stock so non-current assets

are not recorded in the Purchases Journal.• Nor are they cash.• So record them in the General Journal.

General Journal

Office FurnitureGST Clearing Sundry Creditors – ABC FurnitureCredit purchase of Office Furniture(Inv. 11134)

PaymentThe payment will be cash so record it in the Cash Payments Journal.

Note: the payment includes GST but the GST was recorded when the sale was made so don’t record it again.

Date Details Chq Creditor DiscountRevenue

Wages Sundries GST Bank

2-Feb Sundry Creditor – ABC Furniture

3456 6600

Revision of Straight Line Method of Depreciation

Reminder that GST is excluded from the calculation of

Depreciation as it does not effect the ability of the Non

Current Asset to make a profit.

Nic Farley’s Cricket CoachingBalance Sheet as at 31st June 2015

Non Current AssetsComputer 10,000Less Accumulated Depreciation 1,600of Computer

Historical Cost

The value of the non current asset does not change in the Balance

Sheet.

Depreciation ExpenseStraight line method

And Depreciation Expense is calculated on Historical Cost.

Straight line depreciationIt is assumed that the amount of the non-current asset used up each year is the same and therefore so is the amount of depreciation.

Reducing Value Method

Nic Farley’s Cricket CoachingBalance Sheet as at 31st June 2015

Non Current AssetsComputer 10,000Less Accumulated Depreciation 2,752 7,248of Computer

Historical CostReducing Value

The value of the non current asset STILL does not change in the

Balance Sheet.

Depreciation ExpenseReducing method

The Depreciation Expense is calculated on Carrying Value.

Nic Farley’s Cricket CoachingBalance Sheet as at 31st June 2015

Non Current AssetsComputer 10,000Less Accumulated Depreciation 2,752 7,248of Computer

Reducing balance depreciationThis method assumes that the amount of the non-current asset used up each year decreases and therefore so is the amount of depreciation.

Reducing balance

• This method is calculated using a rate e.g. 27.52%.

• So the Historical cost X the rate.• $10,000 x 27.52% = $2,752

• But it is not $2,752 every year because the rate is applied to the Carrying Value in the second year – not the Historical cost.

Reducing balance over time

2015 2016 2017 2018 2019Historical cost 10,000

Less Accumulated Depreciation

Nil

Carrying Value 10,000

Depreciation Expense 2,752

Reducing balance over time

2015 2016 2017 2018 2019Historical cost 10,000 10,000

Less Accumulated Depreciation

Nil 2,752

Carrying Value 10,000 7,248

Depreciation Expense 2,752 1,995

Reducing balance over time

2015 2016 2017 2018 2019Historical cost 10,000 10,000 10,000

Less Accumulated Depreciation

Nil 2,752 4,747

Carrying Value 10,000 7,248 5,253

Depreciation Expense 2,752 1,995 1,446

Reducing balance over time

2015 2016 2017 2018 2019Historical cost 10,000 10,000 10,000 10,000

Less Accumulated Depreciation

Nil 2,752 4,747 6,193

Carrying Value 10,000 7,248 5,253 3,807

Depreciation Expense 2,752 1,995 1,446 1,048

Reducing balance over time

2015 2016 2017 2018 2019Historical cost 10,000 10,000 10,000 10,000 10,000

Less Accumulated Depreciation

Nil 2,752 4,747 6,193 7,241

Carrying Value 10,000 7,248 5,253 3,807 2,759

Depreciation Expense 2,752 1,995 1,446 1,048 759

Comparing Straight-line to Reducing

Historical Cost 10000 Residual Value 2000Useful life 5

Straight line $1600 pa 2013 2014 2015 2016 2017Historical Cost 10000 10000 10000 10000 10000less Accum Dep’n 1600 3200 4800 6400 8000Carrying Value 8400 6800 5200 3600 2000

Residual @ 27.52% 2013 2014 2015 2016 2017Historical Cost 10000 10000 10000 10000 10000less Accum Dep’n 2752 4747 6193 7241 8000Carrying Value 7248 5253 3808 2760 2000

Notice: Reducing Balance Depreciation is higher at the start but both are the same at the same at the

end $2,000

The Debits and Credits

• Are exactly the same for both Depreciation methods.

Depreciation (Expense)

1 April Accumulated Depreciation

2752 30 April Profit & Loss Summary

2752

2752 2752

Accumulated Depreciation

30 April Balance 2752 1 April Depreciation 2752

2752 2752

30 April Balance 2752

The effect on the Financial Reports

• Is the same as for Straight line;– Depreciation still reduces profit & Owner’s

Equity– Accumulated Depreciation still reduces Non

Current Assets– And neither affect Cash Flow because there is

no money involved – it is a non cash transaction.

The effect of depreciation on the accounting equation

Assets Decrease (Accumulated Depreciation decrease the non-current asset

Liabilities No effect

Owner’s Equity

Decrease (Depreciation Expense decreases Net Profit)

Which methods are being used to depreciate these assets?

Accounting Principle

• Consistency demands that once a method of depreciation is chosen, that method should be used from one reporting period to the next.

Qualitative Characteristic

• Comparability is achieved in the reports if consistent depreciation methods are used.

• This allows reports to be compared from one period to the next.

Interpreting graphs

1. Identify the method of depreciation each of the graphs best represents.

1. Identify the method of depreciation each of the graphs best represents.

• Graph 1 illustrates an asset which is depreciation by the same amount each year.

• Graph 2 illustrates an asses which is depreciation by a reducing or smaller each year i.e. the amount of depreciation expense in 2011 is less than in 2010, and the amount in 2012 is less than for 2011.

2. Describe the type of non-current asset that would be best suited to each type of depreciation.

2. Describe the type of non-current asset that would be best suited to each type of depreciation.

• Graph 1 illustrates the type of depreciation appropriate for an asset which contributes to revenue evenly over its useful life e.g. furniture and fittings.

• Graph 2 illustrates the type of depreciation appropriate for an asset which contributes more to revenue when it is new and contributes less as it approaches the end of its useful life e.g. computers or equipment.

3. Graph 1 relates to Display Stands with a historical cost of $90,000. Show how the asset would appear in the Balance Sheet on 31st December 2011.

Note the amount of Depreciation is shown so

$20,000 + $20,000 = $40,000 by 31st December 2011

3. Graph 1 relates to Display Stands with a historical cost of $90,000. Show how the asset would appear in the Balance Sheet on 31st December 2011.

Extract of Balance Sheet as at 31st December 2011Display stands 90,000Less Accumulated Depreciation of Display Stands

40,000 50,000

4. Graph 2 relates to Motor Vehicles with a historical cost of $70,000. Show how the asset would appear in the Balance Sheet on 31st Dec 2011.Note the amount of

Depreciation is shown so $20,000 + $15,000 =

$35,000 by 31st December 2011

4. Graph 2 relates to Motor Vehicles with a historical cost of $70,000. Show how the asset would appear in the Balance Sheet on 31st Dec 2011.

Extract of Balance Sheet as at 31st December 2011Motor Vehicle 70,000Less Accumulated Depreciation of Motor Vehicles

35,000 35,000

Chapter 15 Accounting for non-current assets

• Go do Exercises 15.1 to 15.8