Exam code:4AC1
Adjustments for provision for depreciation
How do I record depreciation on the financial statements?
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Calculate the depreciation charge for the year
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The depreciation charge for the year is shown on the income statement
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The depreciation charge for the year is added to the provision for depreciation to find the total depreciation to date
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The statement of financial position shows:
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The cost of the non-current assets
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The accumulated depreciation to date
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Including the charge for the current year
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The carrying value
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The cost minus the depreciation
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Which accounting concepts are used when recording depreciation?
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The following accounting concepts are used when recording depreciation:
|
Concept |
Reason |
|---|---|
|
Accruals |
The expenditure of the non-current asset is matched to the accounting periods where it is used |
|
Consistency |
The selected method for charging depreciation should be used for each accounting period so that financial statements can be accurately compared |
Worked Example
Carlita owns a restaurant in her local area. Carlita’s financial year end is 30 April.
On 1 May 2022, she bought furniture costing $15 000 and paid for it by cheque. Carlita’s policy for the depreciation of furniture is to use the reducing balance method of depreciation at 20% per annum. Carlita charges depreciation in the year of purchase.
(a) Prepare an extract from the income statement for the year ended 30 April 2023 and an extract of the non-current assets section from the statement of financial position at 30 April 2023.
(b) Prepare an extract from the income statement for the year ended 30 April 2024 and an extract of the non-current assets section from the statement of financial position at 30 April 2024.
Answer
Part (a)
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Calculate the depreciation charge for the first year by finding 20% of the carrying value
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In the first year, the carrying value and cost are the same
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20% ✕ $15 000 = $3 000
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Calculate the carrying value at the end of the first year
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Subtract the total depreciation from the cost
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$15 000 – $3 000 = $12 000
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Prepare the extracts
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Only include the year’s depreciation on the income statement
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Include the cost, total depreciation and carrying value on the statement of financial position
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|
Carlita Extract from the Income Statement for the year ended 30 April 2023 |
|
|
$ |
|
|
Expenses |
|
|
Depreciation of furniture |
(3 000) |
|
Carlita Extract from the Statement of Financial Position at 30 April 2023 |
|||
|
$ |
$ |
$ |
|
|
Non-current assets |
Cost |
Accumulated depreciation |
Carrying value |
|
Furniture |
15 000 |
(3 000) |
12 000 |
Part (b)
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Calculate the depreciation charge for the second year by finding 20% of the carrying value
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20% ✕ $12 000 = $2 400
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Find the total depreciation to date
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$3 000 + $2 400 = $5 400
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Calculate the carrying value at the end of the second year
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Subtract the total depreciation from the cost
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$15 000 – $5 400 = $9 600
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Prepare the extracts
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Only include the year’s depreciation on the income statement
-
Include the cost, total depreciation and carrying value on the statement of financial position
-
|
Carlita Income Statement (extract) for the year ended 30 April 2024 |
|
|
$ |
|
|
Expenses |
|
|
Depreciation of furniture |
(2 400) |
|
Carlita Statement of Financial Position (extract) at 30 April 2024 |
|||
|
$ |
$ |
$ |
|
|
Non-current assets |
Cost |
Accumulated depreciation |
Carrying value |
|
Furniture |
15 000 |
(5 400) |
9 600 |
Responses