Cambrige Notes: Principles of Accounting: 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:

Here are the two depreciation accounts:

The two financial statement extracts

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.

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