ZIMSEC O Level Principles of Accounts Notes: Double entry for depreciation example

  • Here we will assume that you have read
  • The topic about the rationale behind depreciation
  • The topic about the methods of calculating depreciation
  • The entries required to record depreciation in the books
  • If not you should click on each of the above links and familiarize yourself with the topics
  • We will now look at a worked example to demonstrate the concepts set out in these topics

A company maintains its fixed assets at cost. Depreciation provision accounts, one for each type of asset, are in use. Machinery is to be depreciated at the rate of 15% per annum, and fixtures at the rate of 5% per annum, using the reducing balance method. Depreciation is to be calculated on assets in existence at the end of each year, giving a full year’s depreciation even though the asset was bought part of the way through the year. The following transactions in
assets have taken place:

20X5

  1. 1 January Bought machinery $2,800, fixtures $290
  2. 1 July Bought fixtures $620

20X6

  1. 1 October Bought machinery $3,500
  2. 1 December Bought fixtures $130

The financial year end of the business is 31 December.

You are to show:

  1. The machinery account
  2. The fixtures account
  3. The two separate provision for depreciation accounts
  4. The fixed assets section of the statement of financial position at the end of each year, for the years ended 31 December 20X5 and 20X6.

Solution

Here are the asset accounts:

Machinery Account
20x520x5
DateDetailsAmount($)DateDetailsAmount($)
1 JanuaryCash/Bank


2800

31 DecemberBalance c/d


2800

20x620x6
1 January Balance b/d280031 DecemberBalance c/d6300
1 OctoberCash/Bank3500

6300

6300

Fixtures Account
20x520x5
DateDetailsAmount($)DateDetailsAmount($)
1 JanuaryCash/Bank29031 DecemberBalance c/d910
1 JulyCash/Bank620

6300

6300

20x620x6
1 JanuaryBalance b/d91031 DecemberBalance c/d1040
1 DecemberCash/Bank130

1040

1040

Here are the two depreciation accounts:

Machinery Accumulated Depreciation Account
20x520x5
DateDetailsAmount($)DateDetailsAmount($)
31 DecemberBalance c/d

420

31 DecemberProfit and Loss

420

20x620x6
31 DecemberBalance c/d13021 JanuaryBalance b/d420
31 DecemberProfit and Loss882

1302

1302

Fixtures Accumulated Depreciation Account
20x520x5
DateDetailsAmount($)DateDetailsAmount($)
31 DecemberBalance c/d

46

31 DecemberProfit and Loss

46

20x620x6
31 DecemberBalance c/d961 JanuaryBalance b/d46
31 DecemberProfit and Loss50

96

96

The two financial statement extracts

20x5
Fixed AssetsCostAccumulated DepriciationNet Book Value
Machinery2800(420)2380
Fixtures910(46)864

3710

(466)

3244

20x6
Fixed AssetsCostAccumulatedNet Book Value
Machinery6300(1302)4998
Fixtures1040(96)944

7340

(1398)

5942/p>

Where appropriate we have taken the liberty of rounding up the numbers to the nearest dollar. A $0.5 difference is unlikely to be material. Because of double entry the accounts will still balance at the end of the period even if we do this. Care should be taken to ensure this rounding is carried out on both sides.

To access more topics go to the Principles of Accounting Notes.