PQ AAT Advanced Diploma
A step-by-step approach Sam Hannigan explains all you need to know about accounting for the disposal of assets – an important topic
O
ne area that students tend to struggle with is the disposing of an asset. This is a common area that is regularly tested in the AAT assessments. However, what has become apparent to me during the 15 years I have been teaching AAT is that students do not use the double entry technique to help them. Yet this is the one area that all AAT students learn back-to-front and inside out. If students follow the process of double entry bookkeeping on questions such as the disposing of an asset then this subject would be so much easier. Let’s go through a worked scenario. Remember, the AAT may only ask for certain accounts to be completed in a question like this. However, if you follow the steps below you can prepare whatever accounts they require quite easily. Scenario You are working on the accounts for the year ended 31st March 2018. You have sold an item of machinery on 31 July 2017. This was originally purchased on 1 May 2014 at a cost of £20,800. Depreciation is charged using the straight line method at 20% per annum. The residual value of the machinery is expected to be £1,800. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal. The machinery was sold for £12,200 and a cheque was received. Step 1 Draw a T account for each account you will need. Machinery at Cost, Accumulated Depreciation, Disposal and Bank.
Balance b/d (Step 4)
Disposal (Step 6)
Machinery at Cost £ 20800 Disposal (Step 5)
Accumulated Depreciation £ 11400 Balance b/d (Step 4)
£ 20800
£ 11400
Disposal Account £ £ Machinery at cost 20800 Accumulated Depreciation 11400 (Step 5) (Step 6) Statement of P&L (Step 9) 2800 Bank (Step 7) 12200 (Step 6) 23600 23600 (highest)
Disposal (Step 7)
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Bank Account £ 12200
£
Step 2 Calculate the depreciation charge per year. Remember, we are using the reducing balance method so we need to take into account the residual value. Cost £20800 Less Residual Value £1800 X Depreciation rate 20% = £3800 depreciation charge per annum Step 3 Calculate the accumulated depreciation amount. This is where students trip up as they calculate the number of years owned incorrectly. Therefore, don’t be afraid of writing down your workings. Year 1 1 May 2014 – 31 March 2015 Year 2 1 April 2015 – 31 March 2016 Year 3 1 April 2016 – 31 March 2017 Year 4 1 April 2017 – 31 July 2017 was disposed
= £3800 depreciation = £3800 depreciation = £3800 depreciation = £0 depreciation as this is the year the asset
Step 4 Enter the balance b/d in the Machinery at Cost £20800 then enter the TOTAL Accumulated Depreciation £11400. Step 5 Remove the Machinery at cost as this has now been disposed of and enter it in the disposal account. Debit Disposal Account Credit Machinery at Cost Account Step 6 Remove the accumulated depreciation for the vehicle that has been disposed of. Debit Accumulated Depreciation Account Credit Disposal Account Step 7 Enter the disposal proceeds in to the Bank and Disposal Account. Debit Bank Credit Disposal Account Step 8 Balance off the Disposal Account. Remember to total up the highest side first and the balancing figure will be the profit or loss made on disposal. Step 9 Transfer the balancing figure from Step 8 to the Statement of Profit or Loss (SPL). If the transfer in the SPL is a credit entry then a profit has been made. If it is a debit entry in the SPL a loss has been made. PQ • Sam Hannigan, Premier Training
PQ Magazine July 2018