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CSS Series
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Accountancy & Auditing
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Depreciation of NCA &
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Disposal A/C
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Prof. Asif Masood
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CSS Series
Accountancy& Auditing
Depreciation, NCA & Disposal
According to the up to date Syllabus of FPSC
0321-9842495
[CSS Accountancy & Auditing]
[Adam’s Learning Centre, Lahore]
ALC, Lahore.
Prof. Asif Masood
0321 9842495
CSS Series
Accountancy& Auditing
Depreciation, NCA & Disposal
Non-Current Assets, Depreciation & Disposal
Depreciation Expense
In Accounts, Depreciation can be defined as the method of allocating the cost of a physical
asset over its useful life or the time period it is to be used for. In simple words, depreciation is
the reduction in the value of an asset due to the passage of time, normal wear and tear and
obsolescence.
Reasons to Charge Depreciation Expense
➢
➢
➢
➢
Reduction in the value of an asset
Passage of time
Normal wear and tear and
Obsolescence
Considerable Factors About Depreciation
➢
➢
➢
➢
Cost of the Asset
Estimated Scrap Value of the Asset
Estimated Useful Life of the Asset
Any other Important Factor
Methods of Depreciation
1. Straight Line Method
Annual Depreciation = Cost of Asset X Rate of Depreciation
Annual Depreciation =
2. Declining / Diminishing / Reducing / Decreasing Balance Method
(NBV = Cost – Accumulated Depreciation)
Annual Depreciation = Net Book Value X Rate of Depreciation
3. Double Declining / Diminishing / Reducing / Decreasing Balance Method
(In Double Declining Balance Method, Rate of Depreciation is Doubled as under Declining
Balance Method))
Annual Depreciation = Net Book Value X Rate of Depreciation
[Depreciable Value= Cost of Asset – Residual Value]
e.g. Cost- 150,000 Residual Value = 30,000
Life = 5 Years
Years Remaining Life
Depreciation Exp.
Acc. Dep NBV
1
5
5/15 x 120,000 = 40,000
40,000
110,000
2
4
4/15 x 120,000 = 32,000
72,000
78,000
3
3
3/15 x 120,000 = 24,000
96,000
54,000
4
2
2/15 x 120,000 = 16,000
112,000
38,000
5
1
1/15 x 120,000 = 8,000
120,000
30,000
Total
15
4. Sum of Years Digit Method
5. Unit of Activity Method / Production Output Method
Cost = 150,000 Residual Value = 25,000 Total Expected Output = 250,000 Units in 5 Years
Depreciation Per Unit = Depreciable Value / Total Expected Output = 125,000 / 250,000 = 0.5
Years Annual Output
Depreciation Exp.
Acc. Dep NBV
1
60.000
60,000 x 0.5 = 30,000
30,000
120,000
2
55,000
55,000 x 0.5 = 27,500
57,500
92,500
3
50.000
50,000 x 0.5 = 25,000
82,500
67,500
4
45,000
45,000 x 0.5 = 22,500
105,000 45,000
5
40,000
40,000 x 0.5 = 20,000
125,000 30,000
Total
250,000 Units
6. Revaluation Method
(FMV = Fair Market Value)
Depreciation for the Period = FMV at Start of the year – FMV at End of the year
OR
Fair Market Value of the Asset at the Start of the Year
+ New Asset Purchased during the Year
– Asset Disposed during the Year
– Fair Market Value of Asset at the End of the Period.
Depreciation for the Period
ALC, Lahore.
Prof. Asif Masood
XX
XX
(XX)
(XX)
XXX
0321 9842495
CSS Series
Accountancy& Auditing
Depreciation, NCA & Disposal
7. MACRS
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation system used
for tax purposes in the U.S. [Annual Depreciation = Depreciable Value x Rate of MACRS]
Effect on Income Statement /
Effect On Statement Of Financial
Trading and Profit & Loss A/C Position / Balance Sheet
The combined value (Opening balance
Depreciation Expense Account
of reserve for depreciation + Current
Depreciation Expense A/c - Dr.
will be recorded as an expense on Year Charge) of Reserve for
Reserve for Depreciation A/c – Cr.
Dr. side of Income Statement
depreciation will be shown as a
deduction from Cost of the Asset.
Adjustment Entry
Effect on Income Statement / Trading Account
Effect on Statement of Financial Position / Balance Sheet
Other Expenses
Depreciation Expense
Non-Current assets
Asset (Cost)
- Reserve for Depreciation
Date
Date
Depreciation Expense Account
Details
$
Date
Reserve for Depreciation
xx
XX
Total
Reserve for Depreciation
xx
XX
Total
Details
Balance c/d
Total
Balance c/d
ALC, Lahore.
XX
XX
(XX)
Details
Income Statement (Closed to)
Total
Income Statement (Closed to)
Total
Reserve for Depreciation Account
$
Date Details
xx
Depreciation Expense
XX
Total
Balance b/d
xx
Depreciation Expense
Prof. Asif Masood
XX
$
xx
XX
xx
XX
$
xx
XX
xx
xx
0321 9842495
CSS Series
Accountancy& Auditing
Total
XX
Depreciation, NCA & Disposal
XX
Total
Depreciation & NCA Disposal
Depreciation Policy
1. Full Year Convention (a): A full Year (12 Months) depreciation will be charged in the year of
Purchase of Asset, and then no Depreciation will be charged in the year of sale/disposal of
Asset.
2. Full Year Convention (b): No depreciation will be charged in the year of Purchase of Asset,
and then Full Year (12 Months) Depreciation will be charged in the year of sale/disposal of
Asset.
3. Half Year Convention: In half year convention, half year (6 Months) depreciation is charged to
the asset in the year of purchase of asset and half year (6 Months) depreciation is charged to the
asset in the year of disposal of asset irrespective of the months the asset is actually used in the
year of purchase and year of disposal of the asset.
4. Period in Use Method / Month by Month Basis: Depreciation will be charged in the year of
Purchase and Year of Sale/Disposal of Asset according to the Months used in both of the years.
Working for Depreciation - When there is a purchase and/or sale of asset during the
year
*First of all, you need to follow the Method of Depreciation mentioned in the question
*Secondly, you need to follow Depreciation Policy
*Thirdly, Calculate the Depreciation following the DATES provided in the Question
When Full Year Depreciation is charged on the Asset in the year of purchase of Asset but
NONE in the year of sale of asset
1. Reducing Balance Method – Full Year Depreciation in year of purchase but none in year of disposal
Dep. on Disposed Asset
Dep. on Remaining Asset
Dep. on New Asset
(Starting from the year of purchase of
(Only for the current year)
(Only for the current year)
disposed asset)
Cost
X
Cost/Purchase Price of the Asset X
(Opening – Sold)
Cost of Asset
X
-Dep. 1st Year (NBV x %age)
(X)
-Accumulated Depreciation
Depreciation
NBV
X
(Opening - Sold)
(X) (Cost x Rate of Dep.)
X
- Dep. 2nd Year (NBV x %age) (X)
NBV
X
NBV
X
Depreciation
- 3rd Year No Dep. in Year of Disposal 0 (NBV x Rate of Dep.)
X
NBV
X
Sold For $
(X)
Gain/Loss on Disposal
X
2. Straight Line Method – Full Year Depreciation in year of purchase but none in year of disposal
Dep. on Disposed Asset
Dep. on Remaining Asset
Dep. on New Asset
(Starting from the year of purchase of
(Only for the current year)
(Only for the current year)
disposed asset)
Cost (Opening – Sold)
X
Cost of Asset
X
Cost/Purchase Price of the Asset X
Depreciation
Depreciation
-Dep. 1st Year (Cost x %age)
(X)
(Cost x Rate of Dep.)
X
(Cost x Rate of Dep.)
X
NBV
X
- Dep. 2nd Year (Cost x %age) (X)
NBV
X
- 3rd Year No Dep. in Year of Disposal 0
NBV
X
Sold For $
(X)
Gain/Loss on Disposal
X
When Depreciation is charged on the Asset only for the period in use of asset in the year of
purchase or sale of asset
1. Reducing Balance Method – Only for the Months the asset used in the Year of Purchase & Year of Sale
Dep. on Disposed Asset
Dep. on Remaining Asset
Dep. on New Asset
(Starting from the year of purchase of
(Only for the current year)
(Only for the current year)
disposed asset)
Cost
X
ALC, Lahore.
Prof. Asif Masood
0321 9842495
CSS Series
Accountancy& Auditing
Depreciation, NCA & Disposal
Cost/Purchase Price of the Asset X
-Dep. 1st Year (Cost x %age x */12) (X)
NBV
X
- Dep. 2nd Year (NBV x %age) (X)
NBV
X
- Dep. 3rd Year (NBV x %age x */12) (X)
NBV
X
Sold For $
(X)
Gain/Loss on Disposal
X
(Opening – Sold)
-Accumulated Depreciation
(Opening - Sold)
(X)
NBV
X
Depreciation
(NBV x Rate of Dep.)
X
*No. of months the asset was in use
*No. of months the asset was in use
Cost of Asset
X
Depreciation
(NBV x %age x */12)
X
*No. of months the asset was in
use
2. Straight Line Method – Only for the Months the asset used in the Year of Purchase & Year of Sale
Dep. on Disposed Asset
Dep. on Remaining Asset
Dep. on New Asset
(Starting from the year of purchase of
(Only for the current year)
(Only for the current year)
disposed asset)
Cost (Opening – Sold)
X
Cost of Asset
X
Cost/Purchase Price of the Asset X
Depreciation
Depreciation
-Dep. 1st Year (Cost x %age)
(X)
(Cost x Rate of Dep.)
X
(Cost x %age x */12)
X
NBV
X
- Dep. 2nd Year (Cost x %age) (X)
NBV
X
- Dep. 3rd Year (Cost x %age x */12)(X)
NBV
X
Sold For $
(X)
Gain/Loss on Disposal
X
*No. of months the asset was in
*No. of months the asset was in use
*No. of months the asset was in use use
Details
Balance b/d
Cash/Bank (New Asset Purchased)
Balance b/d
Asset Account
$
Details
X
Disposal (Cost of Asset Sold)
X
Balance c/d
XXX
X
Reserve for Depreciation
$
Details
Details
Disposal
(Total Depreciation on Sold Asset)
X
Balance b/d
$
X
X
XXX
$
X
Income Statement
Depreciation on Sold Asset
X
Balance c/d
X
Depreciation on Remaining Asset X
Depreciation on New Asset Bought X
XXX
XXX
Balance b/d
X
Asset Disposal Account
Details
$
Details
$
Reserve for Depreciation (Total
Asset Account (Cost of Sold Asset)
X
X
Depreciation Charge on Sold Asset)
Cash / Bank (Amount recovered from
X
sale of asset)
Gain on Disposal *
X
Loss on Disposal *
X
XXX
XXX
*Either Gain on Disposal or Loss on Disposal according to the situation
ALC, Lahore.
Prof. Asif Masood
0321 9842495