Page 226 - Accountancy_F5

Recording of depreciation in books of accounts

When preparing financial statements, especially the statement of profit or loss, the
matching principle has to be adhered to. That is, income earned has to be matched with
the expenses incurred to generate that income. Depreciation is part of these expenses
which represent a part of the cost of PPE asset that has been used in generating income.
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After computing the depreciation charges for the period, it has to be recorded in books
of accounts. Normally, a separate accumulated depreciation account is prepared for
each group of PPE. This account is credited with the annual depreciation charges and
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debited to the specific non-current asset depreciation expense account. Depreciation
expenses are then transferred to a statement of profit or loss as expenses. The balance of
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the accumulated depreciation for each PPE (which always has a credit balance) is then
deducted from the corresponding cost or revalued amount of a non-current asset in the
statement of financial position. The following illustration shows how depreciation is
recorded in books of accounts and its effect in the statement of profit or loss and in the
statement of financial position.

Example 7.10
Mr. Mwakangale is in his farming business. On 1 April 2022 he purchased a Valmet
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tractor for TZS 80,000,000 and later on he bought a Massey Ferguson tractor for
TZS 64,000,000 on 1 January 2023. The estimated useful life of the Valmet tractor
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is 10 years with a residual value of TZS 20,000,000 while the useful life of Massey
Ferguson tractor is estimated to be 12 years with the residual value of TZS 16,000,000.
Mr. Mwakangale uses a straight-line method of allocating depreciation per year and
prepares his financial statements annually on 31 December.
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Required:
(a) Prepare the following ledger accounts:
(i) Tractors account,
(ii) Accumulated depreciations on tractors account.
(iii) Tractors depreciation account, and
(b) Show the depreciations charges as would appear in the statements of profit or
loss and the statement of financial positions for 2022, 2023 and 2024? (Allow for
the part-year’s use of a tractor in computing the annual charge of depreciation.)

Student’s Book Form Five
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