Accounting Treatment of Depreciation for Non Current Assets

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Following are the accounting procedures or treatment for depreciation non-current assets. The journal entries are as:

(1) Journal entry to record purchase of non-current assets:

Debit = Non-current asset account

Credit = Cash or bank account

(2) Journal entry to record annual depreciation of non-current asset:

Debit = Income statement

Credit = Provision for depreciation account

(3) Journal entries on disposal of non-current assets:

Journal entry to transfer the cost of the non-current asset sold to the disposal account.

Debit = Asset disposal account

Credit = Asset account at cost

(4) Journal entry to transfer all the provision for depreciation on asset sold to the disposal account:

Debit = Provision for depreciation account

Credit = Asset disposal account

(5) Journal entry to record the sales proceeds of the asset sold in the asset disposal account:

Debit = Cash or bank account

Credit = Asset disposal account

(6) Part Exchange of an asset for another or Trade in Allowance – (Definition of Trade in Allowance):

Instead of selling a non-current asset for cash, sometime it is part exchanged for a new asset. In other words, an old asset is traded for a new asset. The value agreed for the exchange of the asset exchanged is known as part exchange or trade in allowance. 

However, as the purchase price for the new asset is normally more than the trade in value of the old asset so the reminder of the purchase price is normally paid by cheque or in cash.

Journal entry to record part exchange of an asset for another:

Debit = New non-current asset account (purchase price for the new asset)

Credit = Asset disposal account (trade in value of the old asset)

Credit = Cash or bank account (difference paid by cheque or in cash)

(7) After passing entries 3 to 6, the disposal account will have either a debit or credit balance: 

(a) Journal entry to close credit balance (profit) in the asset disposal account:

Debit = Asset disposal account

Credit = Income statement (profit)

Note: Profit on disposal arises when the net book value (cost of non-current asset less provision for depreciation) of the non-current asset sold is lower than the selling price.

(b) Journal entry to close debit balance (loss) in the asset disposal account:

Debit = Income statement (loss)

Credit = Asset disposal account

Note: Loss on disposal arises when the net book value (cost of non-current asset less provision for depreciation) of the non-current asset sold is greater/higher than the selling price.