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System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
Hi this is my first time in posting messages so please excuse me. I have gone through all the past papers but still cant get my head around this Journal thing especially when it involves FIXED ASSETS and DEPRECIATION. can anyone help me?

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Exams

    Hi <BR><BR>When a new asset is purchased under accounting standard FRS18 fixed assets must be reported in the balance sheet at the net book value.<BR><BR>You have to think that if you purchase a asset that is not goods for resale and is for the long term use for the business then it is a fixed asset. The inital cost of the entry would be is purchase by cash for example a motor vehicle at £12287.50 (including VAT)<BR><BR>Debit Motor Vehicles at cost £12,287.50<BR>Credit Bank £12,287.50 <BR><BR>or if it will be paid in 30 days time<BR>Debit Motor Veihcles at cost £12,287.50<BR>Credit Sundry Creditors<BR><BR>NOTE: That motor vehicles are not vat claimable and therefore the vat element of the invoice must be included in the total value posted to the fixed asset account. The reason for this is that it is hard to split out on a motor vehicle whether its privately used for for business. Whereas a delivery van is vat claimable and therefore you would only post the net value to the asset account.<BR><BR>In exam you will be asked to depreciated using normally two difference methods: Straight line or reducing balance method. The straight line method is if you are told it is straght line over 5 years or 20%. In this example:<BR>1. Over 5 years - £12,287.50/5=£2,457.50 depreciation per annum<BR>2. 20% = £12,287.50X20%=£2,457.50 depreciation per annum<BR><BR>Reducing method: You will have the intial cost of £12,287.50 and told that accumulated depreciation is £2,457.50 to date. To find out what you should depreciate this year, you need to find the net book value which is the initial cost less accumulated depreciation. £12,287.50-£2,457.50=£9,830.00. For example the depreciation is on a reducin balance method at 20%. We already know the net book balance of £9,830.00, depreciation would be £9,830x20%=£1,966 for the year.<BR><BR>Journal entrys: To account for depreciation you debit Depreciation Expense in the profit and loss and credit accumulated depreciation account.<BR><BR>Why? I hear you ask!! The balance sheet account must reflect the net book value of each asset and you must reflect the value of that asset you have used in each year. This is called the matching concept. The idea is that if you have generate revenue through sales then you have received money to reduce the initial cost of the asset.<BR><BR><BR>On Disposal:<BR><BR>If a asset has been sold then you have to remove the initial cost of the asset and any accumulated depreciation. Remember the rule is the any asset for the inclusion of the balance sheet must be of tru value. If an asset is sold then there is no value to report.<BR><BR>A separate disposal account must be opened<BR><BR>Example: Inital cost of a table is £100.00, accumulated depreciated is £70.00. The item was sold for £5.00 and was banked<BR><BR>Step 1 Remove the inital cost<BR><BR>DR Disposals account £100.00<BR>CR Furniture at cost £100.00<BR><BR>Step 2 Remove the accumulated depreciation<BR><BR>DR Accumulated Depreciation Furniture £70.00<BR>CR Disposals £70.00<BR><BR>Step 3 - Post any proceeds<BR><BR>DR Bank £5.00<BR>CR Disposal£5.00<BR><BR>NOTE: that this account is a temporary account and must be cleared out each year. If you set the disposal entries out on a T account, you need to force balance the left side as you have more debit value than credit value. This means that on disposal the sale of this asset has made a loss of £25.00 and will be posted to the profit and loss account, which will make the diposal account zero.<BR><BR>I hope this helps, give us a shout if you need any more help. These type of questions will always come up in the exam.<BR><BR><BR><BR><BR><BR><BR><BR>

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