Diminishing balance method is also known as written down value, reducing balance method, declining balance method.
Under this method, depreciation is charged on book value for each year.
Each year, depreciation amount is lower than previous year.
Depreciation is calculated on either percentage basis or life of asset basis.
Annual depreciation
Depreciation = Net value x % ÷ 100
Annual depreciation
Depreciation = Net value ÷ Life
Where:
Net value = Purchase value + Transportation + Installation charge + Erection charge – Scrap
Company purchases additional fixed assets when its business grew and expanded.
Fixed asset becomes old or outdated.
In this condition, company sells old asset and purchases new asset.
Sometimes, company can exchange new asset from old asset.
While selling or exchanging, there may be capital profit or capital loss.
Loss is debited in journal entry but profit is credited in journal entry.
(Loss is recorded in credit side but profit is recorded in debit side of asset account)
PROBLEM: 6A
On 1st January 2018, machine account of ABC Company showed debit balance Rs 256,500. Company purchased new machine for Rs 60,000 on 1st July 2019. On 30th June 2020, company sold machine for Rs 30,500 that was purchased on 1st July 2019. On the next day, company purchased new machine for Rs 40,000. Depreciation is charged @ 10% p.a. as reducing balance method. Accounts are closed n 31st December each year.
Required: Machine account for three year
[Answer: Depn: 2018 = Rs 25,650;
2019 = Rs 23,085 + 3,000 = Rs 26,085;
2020 = 20,777 + Rs 2,850 sold + 2,000;
Loss (54,150 – 30,500) = Rs 23,650;
Balance in 2020 = Rs 224,988;
Solution:
Given and working note:
Depreciation @ 10% p.a. on RBM
Particulars |
Date |
Assets |
Total Depn |
|||||||
Old |
New |
Year |
M1 |
M2 = 60,000 |
M3 = 40,000 |
|||||
Balance b/d (BV) |
1 Jan |
|
2018 |
256,500 |
|
|
|
|
|
25,650 |
Depreciation |
31 Dec |
|
2018 |
25,650 |
|
|
|
|
|
|
Book value/Purchase |
1 Jan |
1 July |
2019 |
230,850 |
|
60,000 |
|
|
|
26,085 |
Depreciation |
31 Dec |
31 Dec |
2019 |
23,085 |
|
3,000 |
(6m) |
|
|
|
Book value/Purchase |
1 Jan |
1 July |
2020 |
207,765 |
|
57,000 |
|
40,000 |
|
2,800+ |
Depreciation |
31 Dec |
31 Dec |
2020 |
20,777 |
|
2,850 |
(6m) |
2,000 |
(6m) |
22,750 |
Balance |
|
186,988 |
|
54,150* |
|
38,000 |
|
|
Loss = BSV – CSV = 54,150* – 30,500 = Rs 23,650
Machine Account
ABC Company
For 31 December …
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
2018 |
|
|
2018 |
|
|
Jan, 1 |
To Balance b/d (P1) |
256,500 |
Dec, 31 |
By Depreciation account |
25,650 |
|
|
|
Dec, 31 |
By Balance c/d |
230,850 |
|
|
256,500 |
|
|
256,500 |
2019 |
|
|
2019 |
|
|
Jan, 1 |
To Balance b/d |
230,850 |
Dec, 31 |
By Depreciation account |
26,085 |
July, 1 |
To Bank account (P2) |
60,000 |
Dec, 31 |
By Balance c/d |
264,765 |
|
|
290,850 |
|
|
290,850 |
2020 |
|
|
2020 |
|
|
Jan, 1 |
To Balance b/d |
264,765 |
Jun, 30 |
By Bank account (sold) |
30,500 |
Jul, 1 |
To Bank account (P3) |
40,000 |
Jun, 30 |
By Depn account (sold) |
2,850 |
|
|
|
Jun, 30 |
By P&L account (loss) |
23,650 |
|
|
|
Dec, 31 |
By Depn account |
22,777 |
|
|
|
Dec, 31 |
By Balance c/d |
224,988 |
|
|
304,765 |
|
|
304,765 |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 6B
On 1st April 2018, ABC Company purchased a machine for $/₹/Rs 100,000. On 1st July 2019, another machine was purchased for Rs 200,000. On 30th September 2020, the company sold the machine which was purchased on 1st January 2018 for Rs 60,000. On the next day, another new machine was purchased for Rs 150,000. The accounts of the com are closed as per calendar and depreciation is charged at 15% p.a. on reducing balance method.
Required: Machinery Account from 2018 to 2020
[Answer: Depreciation: in 2018 = Rs 11,250;
in 2019 = (13,313 + 15,000);
In 2020 (8,487 sold + 27,750 + 5,625);
Loss (66,950 – 60,000 = 6,950;
Balance on 31 Dec 2020 = Rs 301,625;
SOLUTION
Given and working note:
Depreciation 15% RBM
Particulars |
Date |
Assets |
|||||||
Old |
New |
Year |
M1 = 100,000 |
M2 = 200,000 |
M3 = 150,000 |
||||
Purchase |
1 April |
|
2018 |
100,000 |
|
|
|
|
|
Depreciation |
31 Dec |
|
2018 |
11,250 |
(9m) |
|
|
|
|
Book value/Purchase |
1 Jan |
1 Jul |
2019 |
88,750 |
|
200,000 |
|
|
|
Depreciation |
31 Dec |
31 Dec |
2019 |
13,313 |
|
15,000 |
(6m) |
|
|
Book value/Purchase |
1 Jan |
1 Oct |
2020 |
75,437 |
|
185,000 |
|
150,000 |
|
Depreciation |
30 Sep |
31 Dec |
2020 |
8,487 |
(9m) |
27,750 |
|
5,625 |
(3m) |
Balance |
|
66,950* |
|
157,250 |
|
144,375 |
|
Loss = BSV – CSV = 66,950 – 60,000 = 6,950
Machinery Account
For the year ended 31st December
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
2018 |
|
|
2018 |
|
|
1 Apr |
To Bank account (M1) |
100,000 |
31 Dec |
By Depreciation account |
11,250 |
|
|
|
31 Dec |
By Balance c/d |
88,750 |
|
|
100,000 |
|
|
100,000 |
2019 |
|
|
2019 |
|
|
1 Jan |
To Balance b/d |
88,750 |
31 Dec |
By Depreciation A/c (M1 + M2) |
28,313 |
1 Jul |
To Bank account (M2) |
200,000 |
31 Dec |
By Balance c/d |
260,437 |
|
|
288,750 |
|
|
288,750 |
2020 |
|
|
2020 |
|
|
1 Jan |
To Balance b/d |
260,437 |
30 Sep |
By Bank account (sold) |
60,000 |
1 Oct |
To Bank account (M3) |
150,000 |
30 Sep |
By Depn account (on sold) |
8,487 |
|
|
|
30 Sep |
By P&L (loss) |
6,950 |
|
|
|
31 Dec |
By Depn A/c (M2+M3) |
33,375 |
|
|
|
31 Dec |
By Balance c/d |
301,625 |
|
|
410,437 |
|
|
410,437 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
PROBLEM: 6C
On 1st January 2018, ABC Company purchased a machine for $/₹/Rs 100,000. On 1st July 2019, another machine was purchased for Rs 200,000. On 1st July 2020, the company sold the machine which was purchased on 1st July 2019 for Rs 175,000. On same date, another new machine was purchased for Rs 150,000. The accounts of the com are closed at the end of December each year and depreciation is charged at 15% p.a. on written down value method.
Required: Machinery Account from 2018 to 2020
SOLUTION
Given and working note:
Depreciation 15% WDV
Particulars |
Date |
Assets |
|||||||
Old |
New |
Year |
M1 = 100,000 |
M2 = 200,000 |
M3 = 150,000 |
||||
Purchase |
1 Jan |
|
2018 |
100,000 |
|
|
|
|
|
Depreciation |
31 Dec |
|
2018 |
15,000 |
|
|
|
|
|
Book value/Purchase |
1 Jan |
1 Jul |
2019 |
85,000 |
|
200,000 |
|
|
|
Depreciation |
31 Dec |
31 Dec |
2019 |
12,750 |
|
15,000 |
(6m) |
|
|
Book value/Purchase |
1 Jan |
1 July |
2020 |
72,250 |
|
185,000 |
|
150,000 |
|
Depreciation |
30 Sep |
31 Dec |
2020 |
10,838 |
|
13,875 |
(6m) |
11,250 |
(6m) |
Balance |
|
61,412 |
|
171,125* |
|
138,750 |
|
Profit = CSV – BSV = 175,000 – 171,125* = 3,875
Machinery Account
For the year ended 31st December
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
2018 |
|
|
2018 |
|
|
1 Jan |
To Bank account (M1) |
100,000 |
31 Dec |
By Depreciation account |
15,000 |
|
|
|
31 Dec |
By Balance c/d |
85,000 |
|
|
100,000 |
|
|
100,000 |
2019 |
|
|
2019 |
|
|
1 Jan |
To Balance b/d |
85,000 |
31 Dec |
By Depreciation A/c (M1 + M2) |
27,750 |
1 Jul |
To Bank account (M2) |
200,000 |
31 Dec |
By Balance c/d |
257,250 |
|
|
285,000 |
|
|
285,000 |
2020 |
|
|
2020 |
|
|
1 Jan |
To Balance b/d |
257,250 |
July 1 |
By Bank account (sold) |
175,000 |
1 July |
To P&L (profit) |
3,875 |
July 1 |
By Depn account (on sold) |
13,875 |
1 July |
To Bank account (M3) |
150,000 |
Dec 31 |
By Depn A/c (M1+M3) |
22,088 |
|
|
|
Dec 31 |
By Balance c/d |
200,162 |
|
|
411,125 |
|
|
411,125 |
PROBLEM: 6D
ABC Development Bank Ltd purchased first equipment for Rs 120,000 on 1st January 2018. On same day, firm purchased additional equipment for Rs 80,000. The firm purchased third equipment on 1st January 2019 for Rs 200,000. On 1st January 2020, first equipment got out of order and exchanged with new equipment of Rs 240,000 from vendor paying cash Rs 180,000.
On 1st January 2021, third equipment was destroyed by fire and insurance company accepted claim for Rs 120,000. Bank charges depreciation @ 10% p.a. under diminishing balance method. Accounts are closed on 31st December each year.
Required: equipment account for four years
[Answer: Depn: 2018 (12,000 + 8,000) = Rs 20,000;
2019 (10,800 + 7,200 + 20,000) = Rs 38,000;
2020 (6,480 + 18,000 + 24,000) = Rs 48,480;
2021 ( 8,832 + 21,600) = Rs 27,432;
Loss on exchange = Rs 37,200;
Loss by fire = Rs 42,000;
Balance in 2021 = Rs 246,888;
Solution:
Given and working note:
Depreciation @ 10% DBM
Details |
Old |
New |
Year |
E1 = 120,000 |
E2 = 80,000 |
E3 = 200,000 |
E4 = 240,000 |
Total depn |
PV |
1 Jan |
|
2018 |
120,000 |
80,000 |
− |
− |
|
Depn |
31 Dec |
|
2018 |
12,000 |
8,000 |
− |
− |
20,000 |
BV/PV |
1 Jan |
1 July |
2019 |
108,000 |
72,000 |
200,000 |
− |
|
Depn |
31 Dec |
31 Dec |
2019 |
10,800 |
7,200 |
20,000 |
− |
38,000 |
BV/PV |
1 Jan |
1 July |
2020 |
97,2001 |
64,800 |
180,000 |
240,000 |
|
Depn |
31 Dec |
31 Dec |
2020 |
|
6,480 |
18,000 |
24,000 |
48,480 |
BV/PV |
1 Jan |
1 July |
2021 |
|
58,320 |
162,0002 |
216,000 |
|
Depn |
31 Dec |
31 Dec |
2021 |
|
8,832 |
|
21,600 |
27,432 |
Balance |
1 Jan |
|
2021 |
|
52,488 |
|
194,400 |
|
−
Purchase value (E4) |
240,000 |
|
Book salvage value |
162,0002 |
Cash paid |
180,000 |
|
Insurance claim |
120,000 |
Different |
60,000 |
|
Loss by fire |
42,000 |
|
|
|
|
|
Book salvage value |
97,2001 |
|
|
|
Loss on exchange (97,200 – 60,000) |
37,200 |
|
|
|
Equipment Account
ABC Development Bank Ltd
For 31 December …
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
2018 |
|
|
2018 |
|
|
Jan, 1 |
To Balance b/d (E1) |
120,000 |
Dec, 31 |
By Depreciation account |
20,000 |
Jan, 1 |
To Bank account (E2) |
80,000 |
Dec, 31 |
By Balance c/d |
180,000 |
|
|
200,000 |
|
|
200,000 |
2019 |
|
− |
2019 |
|
|
Jan, 1 |
To Balance b/d |
180,000 |
Dec, 31 |
By Depreciation account |
38,000 |
July, 1 |
To Bank account (E3) |
200,000 |
Dec, 31 |
By Balance c/d |
342,000 |
|
|
380,000 |
|
|
380,000 |
2020 |
|
|
2020 |
|
|
Jan, 1 |
To Balance b/d |
342,000 |
Jan, 1 |
By Vendor’s A/c (exchange) |
60,000 |
Jun, 30 |
To Vendor account (E4) |
240,000 |
Jan, 1 |
By Depn A/c (on exchange) |
Nil |
|
|
|
Jan, 1 |
By P&L A/c (loss on exchange) |
37,200 |
|
|
|
Dec, 31 |
By Depn account |
48,480 |
|
|
|
Dec, 31 |
By Balance c/d |
436,320 |
|
|
582,000 |
|
|
582,000 |
2021 |
|
|
2021 |
|
|
Jan, 1 |
To Balance b/d |
436,320 |
Jan, 1 |
By Bank A/c (insurance claim) |
120,000 |
|
|
|
Jan, 1 |
By Depn A/c (loss by fire) |
Nil |
|
|
|
Jan, 1 |
By P&L A/c (loss by fire) |
42,000 |
|
|
|
Dec, 31 |
By Depn account |
27,432 |
|
|
|
Dec, 31 |
By Balance c/d |
246,888 |
|
|
436,320 |
|
|
436,320 |
#####
PROBLEMS AND ANSWERS OF DEPRECIATION |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 6A
ABC Marketing (P) Ltd purchased a motorbike for Rs 200,000 on 1st January 2018. On 1st April 2018, it purchased second bike for Rs 250,000. The company charged depreciation @ 20% per annum according to written down value. The Company closes its account on 31st December each year.
Required: Motorbike account from 2018−2020
[Answer: Depreciation in 2018 = (40,000 + 37,500);
2019 = (32,000 + 42,500);
2020 = (25,600 + 34,000);
Balance on closing date = Rs 238,400]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 6B
HP Traders provides laptop to executives. Extracted transactions related to laptop are as given below:
1 Jan 2018: Laptop purchased for Rs 50,000.
1 July 2018: Second laptop purchased of Rs 45,000.
31 Dec 2019: The first laptop sold for Rs 22,000.
1 Jan 2020: New laptop was purchased for Rs 55,000.
Required: Laptop account for first three years by providing depreciation at 25% p.a. under WDV
[Answer: Depreciation: In 2018 = (12,500 + 5,625);
In 2019 (9,375 sold + 9,844);
In 2020 (7,383 + 13,750 new);
Loss (28,125 – 22,000) = Rs 6,125;
Balance on 31 Dec 2020 = Rs 63,398]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 6C
The machine account of XYZ Company shows debit balance Rs 256,500 on 1st January 2018. A new machine costing Rs 60,000 was purchased on 1st July 2019. On 30th June 2020, second machine was disposed-off for Rs 30,500. On the same day, new machine was purchased for Rs 40,000.
Company charged depreciation @ 10% per annum on reducing balance method. It closes its account on 31st December each year.
Required: Machine account for three year
[Answer: Depn 2018 = Rs 25,650;
2019 = (23,085 + 3,000);
2020 = (2,850 sold + 20,777 + 2,000 new);
Loss (54,150 – 30,500) = Rs 23,650;
Balance on 2020 = Rs 224,988]
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