Page 132 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes To understand the above calculation, the following table is most valuable:

Value of the asset (Begin) ` Depreciation ` Value of the asset End `
Col. 1 Col. 2 Col 3=Col.1-Col.2
st
1 year – 1,00,000 20,000 80,000
nd
2 year – 80,000 20,000 60,000
3 year – 60,000 20,000 40,000
rd
4 year – 40,000 20,000 20,000
th
5 year – 20,000 20,000 “0”
th
From the above table, `20,000 is charged on every year to recover `1,00,000 during its life period
i.e. 5 years.
Illustration 2: Original value of the investment- `1,00,000
Scrap value - `10,000
Life of the asset -5 years
` 1,00,000 – 1 0,000 ` 90,000
`
Depreciation = = = `18,000
5 years 5 years
To understand the methodology of straight line depreciation, the following table will illustrate
the process.

Value of the asset (Begin) ` Depreciation ` Value of the asset (End) `
1 year – 1,00,000 18,0000 82,000
st
2 year – 82,000 18,0000 64,000
nd
3 year – 64,000 18,0000 46,000
rd
4 year – 46,000 18,0000 28000
th
th
5 year – 28,000 18,0000 10,000(Scrap value )*
The scrap value of the asset is expected to realize only at the end of the life period of the asset
i.e. 5 years.
Illustration 3: Mr. Shankar purchased a machine for `90,000 on 1st April 1999. Its probable
working life was estimated at 5 years and its probable scrap value at the end of that time is
`10,000. You are required to prepare the necessary account based on straight line method of
depreciation for fi ve years.
To prepare the various accounts of the enterprise connected to depreciation is as follows:
The depreciation charge process is carried out in three stages:

z The asset to be initially purchased: Purchase entry has to be carried out. How is the purchase
made? While making the purchase there are two different accounts that are affected which
are normally known as real accounts. At the moment of purchase on one side the asset is
coming into the firm; on the other side the cash resources are depleted due to the payment

of purchase bill of the asset.
` `
1 April,1999 Plant & Machinery A/c Dr 90,000
To Cash A/c 90,000
Being plant & machinery purchased
z The next account involved in the process of accounting is depreciation account. Before

transacting the depreciation entry in the books of accounts, we must find the amount of
depreciation to be charged against every year’s revenue.

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