Depreciation and Provision for Depreciaton: HELP!

Depreciation and Provision for Depreciaton: HELP!

Dear Affy,<BR><BR>I found out on Sunday that I'd been doing it wrong so my tip of the day is:<BR><BR>If calculating Straight Line depreciation, then calculate the purchase price less the expected residual value (if any) and then divide that figure by the number of periods it is to be spread over.<BR><BR>If using the Reducing Balance method, then it is just a percentage of the whole value of the asset in the first year and then a perecentage of the whole value less the 1st years deprececiation and so on. <BR><BR>Hope this helps,<BR><BR>Angelic

Depreciation and Provision for Depreciaton: HELP!

The way to remember the entries are for depreciation is to think about the "purpose" of depreciation - to put into the P/L account a proportion of the cost of an asset each year.<BR><BR>As such, once you've calculated the depn for a year, this amount has to be an expense (a debit) in the P/L account (traditionally at the bottom of admin expenses).<BR><BR>The entry that you make on the balance sheet can be thought of like this - When you put an asset on the balance sheet you are storing it's value there until the time comes for it to go onto the P/L account. <BR><BR>Because of this, once you've calculated the depn, this is the amount that you have to reduce (credit) the balance sheet asset value by.<BR><BR>*****************************************************************<BR><BR>As for disposals....<BR><BR>You need to think of the entries for disposals as removing all signs of the asset disposed of from the balance sheet.<BR><BR>There are only two signs that it exists: 1. the Cost of Assets (a debit) & 2. the depreciation b/f on an asset (a credit).<BR><BR>Both of these values for any disposed asset must be removed and put into the P/L account, where they are hopefully cancelled out by any sales proceeds.<BR><BR>This is done in three steps:<BR><BR>1.<BR> cr Cost of asset (to remove the cost from the balance sheet)<BR>dr Profit or Loss on disposal of asset (Putting the cost of the asset into the P/L <BR>account)<BR><BR>2.<BR>dr Depreciation b/f (to remove the depreciation to date on that asset)<BR> cr Profit or Loss on disposal of asset (Putting the depreciation on the asset into the P/L account)<BR><BR> (that's all evidence of the asset off the balance sheet and onto the P/L account, just leaving the sales proceeds to go)<BR><BR>3.<BR>dr cash (with the amount received for the asset)<BR> cr Profit or Loss on disposal of asset (Putting the amount received for the asset into the P/L account)<BR><BR>Unfortunately there is no alternative to the entries, so it's just a case of getting your head around WHY you are doing things. Once you can do this the entries become more obvious.<BR><BR>Hope I've helped a bit.