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Depreciation of Fixed Assets Ryan Transport Ltd prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 3 - 2021
Question 3
Depreciation of Fixed Assets Ryan Transport Ltd prepares its final accounts to 31 December each year. The company's policy is to depreciate its vehicles at the rate... show full transcript
Worked Solution & Example Answer:Depreciation of Fixed Assets Ryan Transport Ltd prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 3 - 2021
Step 1
The vehicles account.
Answer
The vehicles account records all transactions related to the vehicles owned by Ryan Transport Ltd. For the year ending 31/12/2019 and 31/12/2020, the vehicles account will reflect the cost of all vehicles alongside any disposals.
2019 Vehicles Account
| Date | Details | Amount (€) | Balance (€) |
|---|---|---|---|
| 01/01/19 | Balance b/d | 242,000 | 242,000 |
| 01/06/19 | Bank and Trade In | (84,000) | 158,000 |
| 31/12/19 | Balance c/d | 158,000 |
2020 Vehicles Account
| Date | Details | Amount (€) | Balance (€) |
|---|---|---|---|
| 01/01/20 | Balance b/d | 158,000 | 158,000 |
| 01/09/20 | Bank | (16,000) | 142,000 |
| 31/12/20 | Balance c/d | 142,000 |
Step 2
The provision for depreciation account.
Answer
The provision for depreciation account is essential for tracking the accumulated depreciation of all vehicles over time, ensuring that the financial statements accurately reflect the decreasing value of assets.
2019 Provision for Depreciation Account
| Date | Details | Amount (€) |
|---|---|---|
| 01/01/19 | Balance b/d | 95,775 |
| 01/06/19 | Disposal - 3 | (23,100) |
| 31/12/19 | Balance c/d | 72,675 |
2020 Provision for Depreciation Account
| Date | Details | Amount (€) |
|---|---|---|
| 01/01/20 | Balance b/d | 72,675 |
| 01/09/20 | Disposal - 1 | (19,200) |
| 31/12/20 | Balance c/d | 53,475 |
Step 3
The vehicles disposal account.
Answer
The vehicles disposal account records the details of any vehicles that have been disposed of during the year along with their respective depreciation and any profits or losses from the disposal.
Vehicle Disposal Account for 2019
| Date | Details | Amount (€) |
|---|---|---|
| 01/06/19 | Vehicles - 3 | (84,000) |
| Depreciation | (23,100) | |
| 31/12/19 | P & L | 60,900 |
Vehicle Disposal Account for 2020
| Date | Details | Amount (€) |
|---|---|---|
| 01/09/20 | Vehicles - 1 | (68,400) |
| Depreciation | (19,200) | |
| 31/12/20 | P & L | 16,400 |
Step 4
Explain why a company charges depreciation in calculating profit.
Answer
Depreciation is charged to reflect the consumption of the economic benefits of tangible assets. It ensures that the profit and loss account provides an accurate view of expenses relative to the revenue generated. This is essential for several reasons:
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Matching Principle: Depreciation allows for the systematic allocation of the cost of an asset to the periods it helps generate revenue, aligning expenses with income.
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Financial Accuracy: Charging depreciation prevents the overstatement of profits by recognizing the reduction in value of fixed assets over their useful lives.
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Asset Management: It provides insights into the condition of the company's assets and ensures funds are set aside for future replacement.
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Tax Implications: Depreciation can affect taxable income, leading to tax savings for the company.
Overall, charging depreciation ensures a true and fair view of the company's financial performance.
Step 5
Show the relevant extract from the profit and loss account year ended 31/12/2020.
Answer
Relevant Extract from the Profit and Loss Account for the year ending 31/12/2020:
Profit and Loss Account Extract
| Description | Amount (€) |
|---|---|
| Less Selling Expenses | (37,800) |
| Vehicles Depreciation | (37,800) |
| Add Profit on Disposal | 400 |