ADJUSTMENTS

Depreciation as an adjustment of final Accounts

Depreciation is an expense charged in the profit and loss account to find the net profit at the
end of a financial year. It is the difference between the cost price of an asset and the disposal
revenue collected or value of the asset at disposal.

Depreciation occurs as a result of various factors such as physical deterioration (decay, erosion,
rust), economic factors (obsolescence and inadequacy), time and depletion.

There are two main methods of calculation used to determine the value of depreciation these
are:-
1. Straight line method
2. Reducing balance method

Straight Line Method:-

CP – disposal value or CP or CP *%
# of yrs of use # of yrs

Reducing Balance Method:-

In this method of calculation a fixed percentage for depreciation is deducted from the cost price
in the first year, and then the same percentage is deducted from the reduced balance
(remaining balance) in each subsequent year.

The percentage used is predetermined by management based on past experience in similar

usage within the industry.

Accounting for depreciation in double entry:-

Cr. Provision for depreciation a/c

Dr. Profit & Loss a/c
Balance sheet entry:-
In the fixed asset section show the accumulated depreciation and net book value of each asset.

Fixed Assets Cost Accum. Depre. NBV