Methods Of Calculating Depreciation For Assets Bought Or Sold During An Accounting Period

July 28th, 2006 Comments off
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Basically, there are three (3) methods of doing computing depreciation for assets bought or sold during an accounting period:

1.    Full year’s Depreciation Is Charged In The Year Of Purchase ignoring the date during the year that the assets were purchased. No depreciation is charged in the year that the assets were disposed irrespective of how months they were in use.

Example:

A machine was bought on 1 st April 2005 for $20,000 and has a depreciation rate of 20% per annum on cost.

Using this method:

Depreciation charged for the full year for financial year 31 st December 2005 of $4,000.

If the asset is disposed of on 30 th June 2006,

Using this method:

NO depreciation is charge for year ended 31 st December 2006 (year of disposal) even though the asset has been used for 6 months in that year.

2.    No depreciation Is Charged In The Year of Purchase But a FULL year’s depreciation in the year of disposal.

Taking item 1 as the same example, then using this method 2, a FULL year’s depreciation of $4,000 is to be charged in the year of disposal (namely 31 st December 2006)

3.  Provision for depreciation is on TIME BASIS.

Example :

A machine was bought on 1 st April 2005 for $20,000 and has a depreciation rate of 20% per annum on cost.

Using this method:

Depreciation charged for for financial year 31 st December 2005 of $4,000 x 9/12 =$3,000

For financial year ending 31 st December 2006, the depreciation charge is $4,000 x 6/12 = $2,000

Salient Point:

For examination, purposes, where the dates on which the assets are purchased or sold are shown, the examiners would normally expect the TIME BASIS method. If no such dates are given, Method No.1 should be used unless stated otherwise.

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Financial Accounting

 
 

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