Adjustments for Depreciation (Cambridge International A-Level Accounting)

Spec point — how to calculate and record the adjustments needed and the effect on financial statements in respect of: – depreciation

Adjustments for depreciation

How do I record depreciation on the financial statements?

• Calculate the depreciation charge for the year

  • See the revision note Depreciation for more information

• The depreciation charge for the year is shown after all non-cash expenses on the statement of profit or loss

• The depreciation charge for the year is added to the provision for depreciation to find the total depreciation to date

• The statement of financial position shows:

  • The cost of the non-current assets

  • The accumulated depreciation to date

    • Including the charge for the current year

  • The net book value

    • The cost minus the accumulated depreciation

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 statement of profit or loss 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 statement of profit or loss 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:

(a)

• Calculate the depreciation charge for the first year by finding 20% of the net book value
• In the first year, the net book value and cost are the same

20% × $15 000 = $3 000

• Calculate the net book value at the end of the first year
• Subtract the total depreciation from the cost

$15 000 - $3 000 = $12 000

• Prepare the extracts

  • Only include the year’s depreciation on the statement of profit or loss
  • Include the cost, accumulated depreciation and net book value on the statement of financial position

Final answer: Carlita Final answer: Extract from the Statement of Profit or Loss for the year ended 30 April 2023
	Final answer: $
Final answer: Expenses
Final answer: Depreciation of furniture	Final answer: 3 000

Final answer: Carlita Final answer: Extract from the Statement of Financial Position at 30 April 2023
	Final answer: $**	Final answer: **$	Final answer: $
Final answer: Non-current assets	Final answer: Cost	Final answer: Accumulated depreciation	Final answer: Net book Final answer: value
Final answer: Furniture	Final answer: 15 000	Final answer: 3 000	Final answer: 12 000

(b)

• Calculate the depreciation charge for the second year by finding 20% of the net book value

20% × $12 000 = $2 400

• Find the total depreciation to date

$3 000 + $2 400 = $5 400

• Calculate the net book value at the end of the second year
• Subtract the total depreciation from the cost

$15 000 - $5 400 = $9 600

• Prepare the extracts

  • Only include the year’s depreciation on the statement of profit or loss
  • Include the cost, accumulated depreciation and net book value on the statement of financial position

Final answer: Carlita Final answer: Statement of Porfit or Loss (extract) for the year ended 30 April 2024
	Final answer: $
Final answer: Expenses
Final answer: Depreciation of furniture	Final answer: 2 400

Final answer: Carlita Final answer: Statement of Financial Position (extract) at 30 April 2024
	Final answer: $**	Final answer: **$	Final answer: $
Final answer: Non-current assets	Final answer: Cost	Final answer: Accumulated depreciation	Final answer: Net book Final answer: value
Final answer: Furniture	Final answer: 15 000	Final answer: 5 400	Final answer: 9 600