Financial Accounting Lesson Note SS1 Third Term

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SS1 THIRD TERM SCHEME OF WORK

1. Revision of last term’s work

2. Preparation of bank reconciliation with credit balances

3. Preparation of bank reconciliation when there is bank overdraft i.e debit balance

4. End of year adjustments in profit and loss account –Accruals and Prepayment

5. Provision for bad debts .Provision for discount allowed and received

6. Bad debt recovered, work exercise

7. Depreciation of fixed assets –meaning, reasons, methods of provision for depreciation, elements,
terminologies. Amortization and depletion

8. Straight line and reducing balance methods. Depreciation schedule, advantages and disadvantages

Of each method-ledger

9. Treatment of Depreciation in profit and loss and balance sheet.

10. Preparation of final Accounts with end of year adjustment.

11&12 revision and exam.

WEEK 2

PREPARATION OF BANK RECONCILIATION WITH CREDIT BALANCES

Elementary treatment of bank reconciliation statement

Three basic methods can be used for the preparation reconciliation statement

These are:

1. Preparation of Bank Reconciliation statement: starting with the balance as per Cash Book.

2. Preparation of bank Reconciliation statement: Starting with the balance as per Bank statement.

3. Adjustment of cash book and preparation of bank Reconciliation Statement.

Method one: Starting With Cash Book Balance

When the cash book balance is used is used ,unpresented cheques, credit transfers, dividends are added
while uncredited cheques , standing order, bank charges, dishonored cheques are deducted giving us
the balance as per bank statement. Layout of bank Reconciliation statement when starting with with
balance as per cash book
 # #

Balance as per cash book xx

Add unpresented cheques x

Dividend x

Credit transfers x

—- Xx

——-

Lesson Note on Physical and Health Education JSS2 Third Term

Lesson Note on Agricultural Science SS 2 First Term

Xx

Less: uncredited cheques x

Bank charges x
 Dishonored cheques x

Standing order x

—— x

——–

Balance as per bank statement xx

———-

ILLUSTRATION 1: On 31st July 1993, Ologolo’s cash book showed a debit balance of #4000. His bank
statement showed a balance of #4270 .On comparison, the following the following were found:

a. Cheque issued amounting to #2500 had not been presented for payment

b. The bank rejected cheques amounting to #140

c. Standing order of #700 to a club was not taken into consideration.

d. A customer, Segun paid #170 directly into the bank without any notice to the firm

e. Bank charges of #160 were #160 were entered in the bank statement only

f. A dividend of #250 was paid directly in the bank and not recorded in the cash book
g. Cheques for #1650 were entered into the cash book and paid to the bank but had not been cleared
thus not credited.

You are required to prepare the bank reconciliation Statement for the month of July 1993

Bank Reconciliation statement as at 31stJuly 1993 # #

Balance as per cash book 4000

Add; presented cheques 2500

Credit transfer 170

Dividend 250

—— 2920

——–

6920

———

Less dishonored cheques 140

 Standing order 700

Bank charges 160

Uncredited cheques 1650

—— 2650

——–

Balance as per bank statement 4270

———

Method Two: Starting with Bank Statement balance

It is also possible to start with the balance as per bank statement. Item like uncredited cheques,
standing order, bank charges, etc. will be added while presented cheques, dividend and credit transfer
will be deducted. At the end, the balance as per Cash book will be arrived at.

Layout of bank reconciliation when starting with balance as per bank statement

# #

Balance as per bank statement x

Add: uncredited cheques x

Standing order x

Bank charges

Dishonored cheques x

Less: presented cheques x

Dividend x

Credit transfer x

—– Xx

——

Balance as per cash book xxx

—–

TREATMENT OF OVERDRAFT
Overdraft occurs when the customer has withdrawn more than what he has in his account. The cash
book will show a credit balance. The procedures needed to reconcile will be a complete opposite of that
needed when the account is not overdrawn. Bank

Layout of bank reconciliation statement when starting with overdraft as per cash book

# #

Overdraft as per cash book x(OD)

ADD: Uncredited cheques x

Standing order x

Dishonored cheques x

Bank commission x

—- X

—–

Xx

Less presented cheques x

 Dividend x

Credit transfer x

—— Xx

—-

Balance as per bank statement xx

—–

Illustration: On 31st December 1999, the cash book of a trader showed a balance of #478 (OD) while his
bank statement showed a balance of #402 (OD).It was discovered that the following transactions were
responsible for the discrepancy between the two balances

a. Cheques issued amounting to #77 had not been presented for payment

b. uncredited cheques #119

c. A standing order with the bank for a subscription for insurance premium #57 was not considered.

d. bank charges amounted to #30

e. dividends of #205 collected and credited by the bank did not appear in the cash book.
You are required to prepare the bank reconciliation statement.

SOLUTION:

Bank reconciliation statement # #

Overdraft as per cash book 478(OD)

ADD: uncredited cheques 119

Standing order 57

Bank charges 30

—– 206

—–

684

Less: presented cheques 77

Dividend 205

—– 282
 —-

Overdraft as per bank statement

402(OD)

—-

NOTE: When overdraft as per bank statement is used then the reverse is the case .All items that were
added will now be deducted ,while all items deducted will now be added.

Layout of bank reconciliation statement when starting with overdraft as per bank

Statement

Bank reconciliation statement as at 31stJune 1999

# #

Overdraft as per bank statement x (OD)

ADD: unpresented cheques x

Dividend x

Credit transfer x
 —- X

Less: uncredited cheques x

Standing order x

Dishonored cheques x

— X

——-

Balance as per cash book xx

—-

Using the question in illustration 3:

# #

Overdraft as per bank statement 402(OD)

Add: Unpresented cheques 77

 Dividend 205

——- 282

——-

684

Less: uncredited cheque 119

Bank charges 30

Standing order 57

—- 206

—–

Overdraft as per cash book 478

—–

EVALUATION: Briefly describe the following terms

1. Un Presented cheques
2. Uncredited cheques

3. Standing order

4. Credit transfer

5. Bank reconciliation statement

6. Direct debit

ASSIGNMENT: Take assignment from book –keeping and accounting textbook revision question 8 & 10
page 114 &115.

Financial Accounting Topics – Edudelight Enotes

BANK RECONCILIATION STATEMENT 2

Comprehensive summary of format of bank reconciliation statement

# #

Balance as per cash book xx

Add: unpresented cheques x

 Dividend x

Interest received x

Credit transfers x

Receipt under cast x

Payment overcast x

— Xx

Xx

Less: Uncredited cheques x

Bank charges x

Interest payment x

Standing order x

Dishonored cheques x
 Payment under cast x

Receipts overcast x

Direct debits x

—– Xx

—-

Balance as per bank statement xx

——

METHOD THREE: Preparation of Adjusted cash book

The cash book will be adjusted before the bank reconciliation statement is prepared. The balance of the
adjusted cash book will be used in preparing the reconciliation statement. This ensures that the items in
the bank reconciliation are reduced

DR Adjusted cash book CR

BAL b/f xx bank charges xx

Payment overcast xx interest payment xx

Credit transfer xx standing order xx

Dividends xx dishonoured cheques xx

Receipts under cast xx receipts overcast xx

Interest received xx payment under cast xx

Direct debits xx

Bal C/D xx

—— —–

Xx xx

—– —–

BAL b/d xx

NOTE: After the preparation of adjusted cash book, the bank reconciliation statement will then be
prepared using the balance as per adjusted cash book.

Bank reconciliation statement #

Balance as per adjusted cash book x

Add: unpresented cheques x

—-

Xx

Less: uncredited cheques xx

—-

Balance as per bank statement xx

———

Overdraft as per bank statement

It is pertinent to state that the cash book and bank statement can be given in the examination. When
this occurs, students are advised to compare the two accounts in order to ascertain the causes of
discrepancy. This will be illustrated below:

Cash book

# #
May 1 bal b/f 4950 May9 Oguns 470

“ 8 Olu 760 “ 26 Adeoba(b) 1060

“ 15 Abbey 540 “ 28 Gbemi (c) 420

“ 26 cash 880 “ 30 balance c/d 6340

“ 30 charles(a) 1160

——- ——–

8290 8290

——– ———-

Bank statement

DR# CR# BALANCE

May1 BAL b/f 4950

“ 8 Cheque: Olu 760 5710

 “ 9 Oguns 470

“ 15 cheque: Abbey 540 5780

“ 26 cash 880 6660

“ 29 credit transfer(d) 520 7180

“ 30 bank charges (e) 200 6980

“ 31 standing order(f) 200 6780

In order to prepare the bank reconciliation statement, the following steps must be followed

Step1: compare CR side of cash book with DR side of bank statement. Any item on the CR of cash book
not on the DR side of bank statement is an unpresented cheque.item b and c (Adeola #1160 and Gbemi
#420) are unpresented cheques.

Step 2: compare DR side of cash book with CR side of bank statement.Any item on the DR side of cash
book not on the CRside of bank statement is an uncredited cheque. Item a (Charles #1160) is uncredited
cheque

Step3 : Compare CR side of bank statement with DR side of cash book .Any item on the CR side of the
bank statement not on the DR side of the cash book can be dividend, credit transfer, ;item d is a credit
transfer

Step4: Compare the DR of bank statement statement with CR of cash book

Any item on the DR of bank statement not in the CR side of cash book can be bank charges, dishonored
cheques, standing order, items e and f are bank charges, and standing orders respectively

Step 5: Prepare the bank reconciliation statement

# #

Balance as per cash book 6340

Add: credit transfer 520

Unpresented cheques: (b) 1060

(c) 420

——- 2000

——

8340

Less uncredited cheque (a) 1160

Bank charges (e) 200

Standing order (f) 200

 ——— 1560

——–

Balance as per bank statement 6780

——–

EVALUATION: Momoh Enterprise cash book showed a debit balance of Le4500 on December 31,
2014 .Further examination revealed the following:

1. A direct debit of Le 350 for subscription had been paid by the bank

2. Bank charges of Le 500 had not been reflected in the cash book

3. Payment settled by standing orders were omitted from the cash book; electricity, bill, Le70 insurance
Le100 and medical bill Le120.

4. A dividend of Le 320 paid directly into the bank had not been entered in the cash book .

5 It was discovered that the cash book balance brought down was undercast by Le180

6. Cheques amounting to Le4800 issued had not been presented for payment.

7. Cheers amounting to Le 1990 paid into the bank had not yet been credited
You are required to prepare

a. the revised cash

b. Bank reconciliation statement as at December 31 2014

SOLUTION momoh enterprise

DR Le Adjusted cash book CR Le

Bal b/f 4500 direct debit 350

Dividend 320 bank charges 500

Receipt undercast 180 standing order 290

Bal c/d 3860

——— ———

5000 5000

———– ———
Bal b/d 3860

Bank reconciliation statement as at December 31st 2014

Le

Balance as per adjusted cash book 3860

Add unpresented cheque 4800

———-

8660

Less :uncredited cheque 1990

——-

Balance as per bank statement 6670

——–

ASSIGNMENT: Take assignment from simplified and amplified book-keeping &accounting for senior sec.
schools revision questions 3 &4 page 122 & 123

Financial Accounting Topics – Edudelight Enotes

 WEEK 4

END OF YEAR ADJUSTMENT IN PROFIT AND LOSS ACCOUNT— ACCRUALS AND PREPAYMENTS

1. ACCRUALS: This concept states that revenue and expenditure are recognized as they are earned or
incurred and dealt with in the profit and loss account for the period to which they relate and not the
period they are paid and received .It can be divided into: accrued income and accrued expenses

a.Accrued income : These are income which are due in respect of the current trading period but such
income have not been received at the close of final accounts preparation.It is also referred to
as outstanding income

Treatment in final accounts

Credited to profit and loss account

Current assets in the balance sheet

Income account

# #

Last yr. accrual x cash x

Profit&loss account x current yr. accrual x

 ——— ——-

Xx xx

———- ——-

BAL b/d xx

Illustration: Write up the ledger account of Mr Monday as at 31st December 1996 showing the transfer
to the final accounts. He earned commission from sales for the year 31st December 1995 #800 owing at
31st December 1996 #1450.

DR commission receivable account CR

# #

Bal b/f 800 cash 8500

P &l 9150 bal b/d 1450

—— ——–

9950 9950

——– ———-
 Bal b/f 1450

NOTE: The balance of #1450 should be treated as current asset in the balance sheet.

b. Accrued Expenses: These are expenses, which accrue but have not been discharged

These could be called expenses owing or creditor for expenses e.g telephone, rates.

Treatment in final accounts

Debited to profit and loss account

Current liability in the balance sheet

Expenses account

# #

Cash paid x amount owing from last yr x

Owing during the trading yr x profit and loss x

—– ——

X x
 —— ———-

Illustration 3: Write up the ledger account of Oando ltd as at 31st December 1998

Motor expenses paid for the year #15000

Motor expenses owing at31st December 1997 #3000

Motor expenses owing at 31stDecember 1998 # 2700

DR motor expenses account CR

# #

Cash 15000 BAL b/f 3000

BAL C/D 2700 p & l 14700

——- ——–

17700 17700

——- ———-
 BAL b/d 2700

The balance of #2700 should be treated as current liability in the balance sheet

2. PREPAYMENTS: Prepayments represent amount paid in the current period for a subsequent
period .Expenses can be paid in advance and income can also be received in advance. It can be referred
to as Prepaid or paid in advance.

a. Expenses in advance: These are expenses like rent ,insurance ,etc which are paid in advance for
subsequent period .Only the expenses for the period must be charged to the profit and loss account

Treatment in final accounts

Reduction of expenses debited to profit and loss account

Current assets in the balance sheet

DR Expenses account CR

# #

Prepaid last year x prepaid for next year x

Cash x p&l x

—– —–
 Xx xx

—— ——-

Bal b/d x

Illustration: Write up the ledger account of Mr Okonkwo as at 31st December 1998.He paid insurance of
#5000 for the year ended 31st December 1997 #740 .prepaid as at 31st December 1998 #1000

DR Insurance account CR

# #

Prepaid last year 740 prepaid for next year 1000

Cash 5000 p&l 4740

——– ——-

5740 5740

—— —–

Bal b/d 1000

The balance brought down of #1000 will be treated as current asset in the balance sheet
b. Income in advance: These are income received by the organization during the current period which
relates to the next trading period e.g rent received in advance.

Treatment in final accounts

Decrease income credited to the profit and loss

Current liability in the balance sheet

DR income account CR

# #

P&l X last year advance x

Advance for next year x cash x

—– —-

Xx xx

——– —-

Bal b/d x
Illustration: Write up the ledger account of Mr. Jones as at 31st December 1999.He earned commission
of #30000 for the year 31st December 1999. Prepaid as at31st December 1998 #7700; paid in advance at
31st Dec. 1999 was #6830

DR Commission receivable account CR

# #

P&L 30870 last year advace 7700

Advance for next year 6830 cash 30000

———- ———

37700 37700

——– ———

BAL b/d 6830

The balance brought down of #6830 will be treated as a current liability in the balance sheet

CAPITAL AND EXPENDITURE ITEMS

Capital Expenditure:These are expenditure incurred in purchase of fixed assets or which add to the value
of an existing fixed asset. The benefits will not be fully consumed in period but spread over several
periods .It includes expenditure on:
a. Acquisition or purchase of fixed assets

b. Improvement of assets in order to add value

c. Increase of the earning capacity of a business.

E.g Cost of acquiring fixed assets , installation cost , legal cost of buying buildings, .Capital expenditure
will never appear in the profit and loss account but only in the balance sheet,

REVENUE EXPENDITURE: These are expenditure incurred in the day –today-day running of the business
of the in a period of accounts ,the benefit of which is consumed in that period .It includes:

a.Maintenance of assets

b. Expenditure on day –today administration.

FEATURES OF REVENUE EXPENDITURE:

a. It relates to one accounting period

b. It is posted to the the income statement

c.Accrued expenses are added in the income statement

e.g. repairs ,depreciation ,rates and wages . It will be charged to the profit and loss account.
DEFERRED REVENUE EXPENDITURE : These are expenditure which are incurred in one accounting period
but which provides benefits in future period and are not written off in one period e.g advertising
expenditure

CAPITAL EXPENDITURE REVENUE EXPENDITURE

a. Includes expenditure on acquisition includes expenditure on repairs and

Of assets maintenance of assets

b. Charged to the appropriate real or charged to appropriate nominal account

Asset account

CAPITAL RECEIPTS: These include money injected into the business permanently or for a long period e.g.
proceeds of an issue of shares, sales of assets, additional capital paid in.

REVENUE RECEIPTS: These are revenue arising from the daily activities of the business such as cash from
sales, discounts received, commission received and interest on investment.

Capital receipt revenue receipts

Includes all money received as additional include all income earned by the
As additional capital or proceeds from sales the business

Of assets.

They are credited to capital or asset they are credited to income account

Account

EVALUATION: 1write up the ledger accounts of Okete for year ended 30thJune 1999.Insurance paid for
the year to 30th June 1999 #10000; owing at 30 June 1998 #1500; owing at 30th June 1999 #2300

expenditure: I Interest on loan to purchase micro computer

2. Cost of software for use with the micro computer

3. Cost of customizing the software for a company’s use

4. Cost of paper used by the computer printers

5. Wages of computer operators

6. Cost of ribbon used by the computer printers

7. Cost of adding extra memory to the micro computer

8. Cost of adding a manufacture’s upgrade to the micro computer equipment

9. Cost of floppy discs used during the year

10. Cost of adding air conditioning system to the computer room.

WEEK 5 & 6

PROVISION FOR BAD DEBTS ,PROVISION FOR DISCOUNTS ALLOWED ANDRECEIVED.

RESERVES: These are amount set aside out of profit and other surpluses, which are not designed to meet
any liability or losses but are retained in the business in order to strengthen the financial position of a
business

Examples

a.share premium

b. capital redemption reserve fund

c. revaluation surplus

Reserve can be divided into two:

1. Capital reserves: These are reserves which are not available for distribution as dividends.

e.g
1. Share premium

2. Pre- incorporation profit

3. Profit on forfeiture of shares

4. Capital redemption reserve fund

5. Surplus on revaluation of assets

Revenue reserves: These are normally regarded as available for distribution through the profit and loss.
It can be divided into general reserve and specific reserves

a. General reserves: This is created by setting aside profits in order to strengthen the general financial
position of a business

b. Specific reserve: These are set aside out of profits for a specific purpose

PROVISIONS: They are set aside out of profit to provide for depreciation, renewals, diminution in the
value of asset of which the amount cannot be determined with substantial accuracy.

Examples:

a. Provision for depreciation

b. provision for doubtful debts

c. provision for discounts allowances

BAD DEBTS: These are debts, which have become irrecoverable .It is charged against profit on the debit
side of profit and loss account.Bad debt occurs as a result of the inability of the customer to pay his
debt. It will reduce the account of debtors in the balance sheet.

Reasons for bad debt

Death or insolvency of the debtor

PROVISION FOR DOUBTFUL DEBTS:This is an estimated expense for bad debts

Which cannot be calculated with substantial accuracy .This is charged to the profit and loss as an
expense

ACCOUNTING ENTRIES FOR PROVISION FOR DOUBTFUL DEBTS

Accounting entries for provision

Year1 :year in which provision is first made

Dr:profit and loss

Cr: provision for doubtful debts

Year2: To increase the provision

DR Profit and loss account

CR:Provision for doubtful debts account

To reduce the provision

Dr provision for doubtful debts account

Cr profit and loss account.

BAD DEBTS RECOVERED:

It is possible to recover debts written off earlier .When this occurs ,the book-keeping procedures are as
follows:

DR:Debtors accounts

CR;Bad debts recovered account

WHEN CASH IS RECEIVED FROM DEBTORS

DR cash book

CR debtors account
Transfer of debts recovered to profit and loss account

DR Bad debts recovered account

CR Profit and loss account

PROVISION FOR DISCOUNTS:

Provision for discount on debtors: This is a charge made against profit in order to provide for an
expected loss in the form of discounts that will have to be allowed to the firm’s debtors on payment of
their accounts .It should be calculated on the net amount of debtors after deducting any provision for
doubtful debts.

Provision for discount on creditors: This is an addition to the profits to provide for those discounts
expected to be received on payment of the firm’s creditors

Illustration : The debtors balance as at 31st December are #20000. A bad debt provision of 10% is made
and also a discount provision of 10%. The discounts allowed during the year amounted to #700 .The
discounts provision on 1st January was #800.

Show the Journal, ledger ,profit and loss and balance sheet.

SOLUTION

journal

DR CR
 # #

Profit and loss account 700

Discounts allowed 700

Transfer of discounts to profit and loss

Profit and loss account 1000

Provision for discount on debtors 1000

Increase in provision for discount

Workings:

Provision for bad debts :10% x20000=#2000

Provision for discounts on debtors;debtor 20000-2000=18000 x10%

=#1800 new provision

=800 old provision

——-
1000 increase in provision

——

Notes:provision for bad debts must be deducted first before calculating the provision for discount.

Ledger Entries

DR Discount allowed accounts CR

# #

Debtors 700 p&l 700

DR Provision for discount on debtors account CR

Dec 31 bal c/d 1800 Jan. 1 bal b/d 800

p& l 1000

——— ——–

1800 1800
 ———- ——–

DR P&l account CR

Discount allowed 700

Prov. For discount on debtor 1000

DR Balance sheet extract CR

# #

Debtors 20000

Less:prov for doubtful debt 2000

———

18000

Less prov.for discount 1800

———- 16200
Illustration:2 On 1st January , the provision for discounts on creditors was #2000. The discounts received
during the year amounted to #2100.The creditors at 31stDecember was #12000 and a new provision of
20% is required. Show the journal , ledger ,profit and loss account and balance sheet.

SOLUTION:

JOURNAL

DR CR

Discount received account 2100

p&L account 2100

Transfer of discount to profit and loss account

Provision for discount on creditors 400

P & l account 400

Increase in provision for discount on creditors

Workings:provision for discount on creditors: 12000×20%=2400

New provision 2400

Old provision 2000

——— #400

Ledgers Entries

DR Discount received CR

# #

P &L 2100 Creditor 2100

DR Profit and loss account CR

# #

Discount received 2100

Prov. For discount on creditor 400

Provision for discounts on creditor account

DR CR

Bal b/b 2000 bal c/d 2400

Profit & loss 400

——- ——–

2400 2400

—— ——-

BALANCE SHEET

# #

Creditors 12000

Less provision 2400

——–

9600

———

EVALUATION:Explain the following terms :

a. bad debts b. provision for doubtful debts c reserves d provision for discount on creditors

ASSIGNMENT:Take assignment from simplified and amplified book-keeping & accounting for senior sec
school revision question 4 page 161

Financial Accounting Topics – Edudelight Enotes

WEEK 7-9

DEPRECIATION OF FIXED ASSETS

Definition:1. Depreciation can be defined as the fall or decrease in the economic service potential of an
asset as a result of wear , tear ,usage, obsolescence and inadequacy.

2. Depreciation can also be defined as the fundamental process of recognizing the loss in the value of
fixed assets as a result of usage.

3. The statement of accounting standard defines depreciation as an estimate of the portion of the
historical cost or revalued amount of a fixed asset chargeable to operations during an accounting period.

REASONS FOR DEPRECIATION

1. Since it reduces net profit , tax will be reduced

2. The value of the assets will not be overstated in the balance sheet.

3. The firm may have fund to replace the assets

4. It ensures that the cost of an asset is spread in an equitable fashion over its estimated life

5. It helps to ascertain the true profit because it is deducted from the gross profit

FACTORS TO BE CONSIDERED IN THE COMPUTATION OF DEPRECIATION

1. Method of depreciation

2. The historical cost

3. Estimated useful life

4. Estimated scrap value.

5. Internal causes of depreciation

6. External causes of depreciation

ELEMENTS OF DEPRECIATION

a. Original cost of asset: This refers to the cost incurred in purchasing an asset. This include the actual
cost, cost of carriage, cost of installation and other capitalized expenditure on the assets.

b. salvage value: This is the estimated value recovered when the asset is disposed of at the end of its
useful life.
c. Estimated useful life: This is the number of years of expected use.

USEFUL TERMINOLOGIES

1. Depletion:This is the process of allocating the cost of the natural resources to the units
removed .Examples of assets are timber , mining etc.

2. Appreciation: This is a permanent increase in the value of an asset. Accounting procedure usually
ignores bringing appreciation into account as this will go against the cost and prudent concepts.

3. Amortization: Assets with fixed period of legal life such as lease, patent, copyright, also depreciates.
Depreciation for such assets is regarded as amortization. Amortization can be defined as the provision
made for the consumption of intangible assets

METHODS FOR CALCULATING DEPRECIATION

The method which is chosen for calculating depreciation on any depreciable asset may be based on the
usage or contribution of the asset to operations or on the passage of time. Importantly, the nature of an
asset determines the appropriate method to be used.

Method based on the level of usage

The depreciation method based on the level of usage or output are as follows;

a. Service hour
Under the service hour method, the life span of a depreciable asset is determined by the total number
of hour it can be used in producing the goods and services. The depreciable amount of the asset is
divided by the estimated total service hours to obtain the depreciation rate per hour which is then used
to multiply the total hours of use of the assets during the period

b. Productive output:

Under the productive output method, the life span of the depreciable asset is determined in terms of
the total number of units it could produce .The depreciable amount of the asset is divided by the
estimated total number of units to obtain a unit depreciation rate, which is then used to multiply the
total output for the period to derive the depreciation expense for the period

METHOD BASED ON THE PASSAGE OF TIME

The method based on the passage of time are as follows

1. Straight line method

2. Reducing balance method

3. Sum- of –years ‘digits method

4.Annuity and sinking fund method

Straight line method

This method is at times called fixed deposit method because it allocates a fixed percentage of the
original cost of the asset equally to business operations at each year of the estimated useful economic
life of the asset, and thus reduces the asset to nil or break-up value at end of its life.
The depreciation amount is computed by dividing the original cost of the fixed asset minus the
estimated residual value by the useful life of the asset.

A mathematical formula can be deduced as follows

Annual depreciation = original cost of asset – residual value/Estimated useful life

Illustration: A motor vehicle was purchased for #300000 on January 1, 2006.The motor vehicle is
estimated to have useful life of 5 years and a residual value of #20000

You are required to calculate:

a. The depreciation charge for each year

b. The accumulated depreciation charge

c. The net book value as at the end of 2010 using the straight line method

Solution:

Original cost =#300000

Estimated useful life=5 years

Residual value =#20000

Applying the formula given above

Annual depreciation=300000-20000/5=280000/5=#56000

MOTOR VEHICLE ACCOUNT

CASH 300000

DOUBLE ENTRY RECORDS FOR DEPRECIATION

The calculation and determination of depreciation charge for an accounting year necessitates correct
recording in the books of account. The process of providing for depreciation entails the recording of the
use of fixed assets during an accounting period.

DR Accumulated provision for depreciation account CR

31/12/2006 bal c/d 56000 31/12/2006 depr exp. 56000

31/12/2007 bal c/d 112000 1/1/2007 balb/d 56000

31/12/2007 bal b/d depr exp 56000

——— ———

112000 112000
 ——– ———-

31/12/2008 bal. c/d 168000 1/1/2008 bal b/d 112000

31/12/2008 depre exp. 56000

———— ______

168000 168000

———— ______

31/12/2009 bal c/d 224000 1/1/2009 bal b/d 168000

31/ 12 2009 depr exp 56000

_______ ______

224000 224000

_______ ______

31/12/2010 bal c/d 280000 1/1/2010 bal b/d 224000

 31/12/2010 Depr exp 56000

_______ ______

280000 280000

________ _______

DR Depre exp. account CR

# #

31/12/2006 accum provision 56000 31/12/2006 p&l a/c 56000

31/12/2007 accum provision 56000 31/12/2007 p& l a/c 56000

31/12/2008 accum provision 56000 31/12/2008 p & l a/c 56000

31/12/2009 accum provision 56000 31/12/2009 p&l a/c 56000

31/12/2010 accum provision 56000 31/12/2010 p&l a/c 56000

DR Profit & loss Account (extract) for the relevant year end CR

2006 Depre. Expense. 56000

2007 “ “ 56000

2008 “ “ 56000

2009 “ “ 56000

2010 “ “ 56000

DR Balance sheet (extract) as at December for the respective years

2006: # #

Motor vehicle at cost 300000

Less: Accum depr (56000) 244000

2007

Motor veh at cost 300000

Less Accum depr (112000) 188000

2008
 Motor veh.at cost 300000

Less accum depr (168000) 132000

2009:

Motor veh at cost 300000

Less accum depre (224000) 76000

Motor veh at cost 300000

Less Accum depre (280000) 20000

Reducing balance method or diminishing balance method

Under this method of charging depreciation, the book value of a fixed asset at the beginning of the year
is multiplied by a fixed percentage in order to determine the depreciation for the accounting year. This
procedure is repeated in the subsequent years of usage of the asset so as to reduce the depreciable
value of the fixed asset to zero (i.e to reduce the cost to its residual value).

2. Using reducing balance method

Illustration 2 ; on 1. January, Megida limited purchased equipment for #350000.It is the policy of the
business to depreciate plant at 25%. You are required to show the equipment account.

SOLUTION
Calculation of annual depreciation

Year 2001: Depreciation calculation

=25%x350000=#87500

Year 2002: Depre calculation

=25% (350000-87500)

=#65625

Year 2003:depre calculation

25%x(350000-(87500+65625)=#49218

Year 2004 depreciation calculation

25%x(350000-(87500+65625+49218)

#36914

Ledger accounts
 DR Equipment account CR

1/12003 350000

DR Accumulated provision for depreciation a/c CR

# #

31/12 2003 bal b/d87500 31/12/2003 depre exp. 87500

31/12/04 bal b/d 153125 1/1/2004 bal b/d 87500

31/12/2004 dep exp. 65625

________ ______

153125 153125

_______ _______

31/12/05bal c/d 202343 1/1/2005 bal b/d 153125

31/12/05 depre exp. 49218

 ______ _______

202343 202343

_______ _______

31/12/06 bal c/d 239257 1/1/2006 bal b/d 202343

31/12/2006 depr exp. 36916

______ _______

239257 239257

______ _______

DR Depreciation expense account CR

# #

31/12/2003 prov. For dep. 87500 31/12/2003 p&l 87500

31/12 2004 “ “ “ 65625 31/12/2004 P&l 65625

31/12/2005 “ “ “ 49218 31/12/2005 p&l 49218

31/12/2005 “ “ “ 36914 31/12/2006 p&l 36914

profit and loss account(extract) for the relevant year end

2003 #

2003 depreciation exp. 87500

2004 “ “ “ 65625

2005 “ “ “ 49218

2006 “ “ “ 36914

Balance sheet (extract) as at 31 Dec. for the respective year

# #

Equipment at cost 350000

Less depre. 87500

______ 262500
 2004

Equipment at cost 350000

Less depreciation 153125

Net book value 196875

2005

Equipment at cost 350000

Less depreciation 202343

_____ 147657

2006

Equipment 350000

Less depreciation 239257

______ 110743
Depletion Method:The method is used for wasting assets such as quarry , mine timber etc.they are
depreciated by charging depreciation by the unit extracted

Illustration: The right to work a mine cost #90000 and the estimated quantity is 900000 tons output for
three years are as follows.

1st year 1500 tons

2nd year 4800 tons

3rd year 7000 tons

SOLUTION:

DR MINE ACCOUNT CR

# #

Year 1 cash 90000 year 1 p&l 150

Bal c/d 89850

______ ______

90000 90000
 ______ _____

Year2 :bal b/d 89850 year2 p&l 480

Bal c/d 89370

______ _____

89850 89850

______ ______

Year 3:bal b/d 89370 year3 p&l 700

Bal c/d 88670

_____ ______

89370 89370

_____ ______

Bal b/d 88670

Workings:year1 1500/900000×90000=#150
Year2 =4800/900000×90000= #480

Year3 =7000/900000×90000=# 700

DR Profit and loss account CR

# #

Year 1 : Depreciation 150

“ 2 “ 480

“ 3 “ 700

4. Revaluation Method: Under this method, the asset is revalued each year, any difference will be
charged to the profit and loss account . Assets like loose tools , livestock, cattle ,cannot be easily
depreciated because of their nature ,hence they are revalued on yearly basis.

The calculation is as follows: #

Opening stock x

Add purchases during the year x

_____
 Xx

Less closing stock x

___

Consumption in a year x

___

Illustration: 1st January 1999 ,stock of loose tools #15000. Purchases during the #4500.On
31st December 1999, stock of tools #15600.

Show the necessary accounts

Calculation of depreciation #

Loose tools: opening stock 15000

Purchases 4500

____

19500
 Less closing stock 15600

_____

Depreciation 3900

______

DR Loose tools account CR

# #

1999 1999

Jan. bal b/d 15000 Dec.31 depreciation 3900

Dec.31 cash 4500 Dec,31 bal c/d 15600

_____ ____

19500 19500

____ _____

DR depreciation account CR
 # #

1999

Jan. loose tools 3900 Dec.31 p&l 3900

DR Profit and loss CR

# #

1999 Dec. depreciation 3900

balance sheet

# 1999 #

Loose tools 19500

Less depreciation 3900

____ 15600

5. Machine Hour Rate Method: This is an estimate of the total effective working hours of the machine
during its expected useful life .
The cost of the machine less its scrap value (if any )divided by the estimated working hours will give us
the machine hourly rate .The charge for depreciation is therefore the actual number of hours the
machine was operated during the period.

Illustration: A company purchased plant and machinery at a cost of #105000 with an estimated total
effective hour of 125000 and scrap value of #5000. The number of hours the plant and machinery was
put into use for the first 3years are stated below:

Year1 10000 hrs.

Year2 12000 hrs.

“ 3 13000 hrs

Required; calculate the yearly depreciation

Rate per hour= cost –scrap value/estimated effective hour

=105000-5000/125000=#0.80

Yearly depreciation charge

Year1 = 10000x#0.8 =#8000

“ 2= 12000x#0.8=#9600

“ 3= 13000x #0.8=10400
6.Sum Of The Years Digit Method :Under this method , the years in the life of the assets are represented
with digits and are added .The fraction of the assets cost are charged to the years in reverse order.It
means , on five year life,that the first year will attract 5/15 and the second year 4/15 etc

Illustration:A machine cost #9000 and has a life of3 years after which it can sold for #1800

SOLUTION

YEAR DIGIT

1 3

2 2

3 1

Sum of the digits 6

Depreciation charged for each year will be

Year

1 3/6x(9000-1800)= #3600

2 2/6 x(9000-1800)=#2400
3 1/6 x(9000-1800)= #1200 total =#7200

EVALUATION:

1. List 6 methods of depreciation and explain any three

2. Briefly explain the following terms with examples

a. Amortization

b. depletion

c.depreciation

d. appreciation

ASSIGNMENT:

A machine XYZ bought by a business firm has the following data

Cost of purchase = #200000

Installation cost =#25000

Annual maintenance cost=#15000

Estimated useful life =5years

Estimated residual value #10000

Determine the following:

a.What is the historical cost of the machine to be recorded?

b. Determine the annual depreciation charged using straight line method of depreciation

c. Prepare the following ledger accounts;

1. asset

2. Provision for depreciation account

3 Depreciation expense account

4. Profit and loss extract

5 balance sheet extract.

WEEK 10
PREPARATION OF FINAL ACCOUNTS WITH END OF YEAR ADJUSTMENTS

Illustration: below is the trial balance of olonto as at 31st Dec.2011

Dr # cr #

Capital 32000

Purchases 15610

Drawings 4000

Rates and taxes 388

Interest receivable 48

Salaries 1612

Lighting and heating 164

Electric power 384

Travellers’commision 414
Insurance 206

Advertising 214

Sales 34080

Bad debts 62

Income receivable 48

General expenses 604

Postage 222

Carriage inwards 754

Stock 6160

Stationery 7962

Land and building 15840

Plant and machinery 4034

Furniture and fittings 378

Debtors 6080

Creditors 4182

Cash in bank 5270

_________ ______

70358 70358

_____ ______

Additional information:

a. provide 20% for discount on debtors and create a bad debt provision of 10%

b. Depreciation of 5% is to be written off on plant and machinery and furniture 10%

c. Stock at close #8760

d. Stationery owing #300

e. insurance paid in advance amounted to #40

f. Write off bad debt of #1000

g. The owner withdrew goods worth #1500

h. Income receivable in advance #20

I. interest receivable in arrears #10

You are required to prepare:

The Trading profit and loss account and balance sheet as at 31st Dec.2011

SOLUTION: Olonto

dr Trading profit and loss account for the year ended 31st DEC 2011

# # # #

Opening stock 6160 sales 34080

Add purchases 15610

Carriage inward 754

____
 16364

Less goods withdrawn 1500

____ 14864

______

21024

Less closing stock 8760

______

12264

Gross profit 21816

_____ ______

34080 34080

_____ ______
Expenses: gross profit 21816

Rates 388 income receivable(48-20) 28

Salary 1612 interest receivable (48+10) 58

Light 164

Travellers’ commission 414

Electricity 384

Insurance (206-40) 166

Advertising 214

Bad debts(62+1000) 1062

General expenses 604

Postage 222

Stationery (7962 +300) 8262

Provision for bad debts 508

Provision for discount allowance 914

Depreciation:

Furniture 38

Plant 202

Net profit 6748

____ _____

21902 21902

____ ____

Olonto

Balance sheet as at 31st Dec. 2011

# #

Capital 32000 Fixed assets:

Add net profit 6748 land and building 15840

_____ plant & machinery 4034

38748 less :depreciation 202

Less drawings (4000 +1500) 5500 _____ 3832

____

33248 furniture 378

Less depreciation 38

___ 340

____

20012

Current liabilities:

Creditors 4182 current assets:

Stationery owing 300 cash at bank 5270

Income 20 stock of goods 8760

Insurance prepaid 40

Debtors 6080

Less bad debt 1000

____

5080

Less prov.for debt 508

___

4572

Less prov. For discount 914

3658

Accrued interest 10
 ______ ____

37750 37750

____ _____

WORKINGS:

DEPRECIATION:

1. Plant and machinery: 4038×5%=202

2. furniture: 378×10%=38

3. debtors 6080

Less bad debt 1000

____

5080

Less prov.for bad debt(10%x5080 508

___
 4572

Less: prov. For discount(20%x4572)914

____

3658

ASSIGNMENT:

Take assignment from simplified and amplified book-keeping& accounting

For senior sec school revision question 4x page 211 and revision question 5 page212