I enclosed question to tutor from opentuition. Student asked about depreciation in the year of disposal and tutor said it makes no sense to depreciate in the year of disposal. Can anybody tell me why it doesn't make sense to depreciate in the year of disposal ?
Hi Rafal
The answer is in Mike's words
''But why bother? Whether we do or we dont depreciate in the year of sale has no affect on profit for the year! If we dont depreciate, then profit (or loss) on disposal will be higher (or lower) than if we do depreciate by exactly the amount of the depreciation.''
Try a short worked example or two - one with no depreciation in year of disposal and one with a pro-rated amount. Post the entries to T accounts/do your double entry and see what impact they have on the profit. Then all will become clear. Post of here if you want them checking/are still struggling.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I find that many stakeholders want to look at a monthly P&L, so if that is required, depreciation should be done monthly if the depreciation is substantive. Xero for example seems to handle this well.
They don't want to read through profits for each month over a year and find that the YE month has extra expenses due to that being the only month that depreciation is calculated.
I suppose I'm thinking holistically - ie the bookkeeping is kept so that management can see their monthly reports and the financial accounting would flow from the same data - in which case wouldn't there be asset depreciation showing despite a mid year disposal?
I suppose the main thing to say, in summary of what has been said above, is that, in the year of disposal, depreciation + profit/loss on disposal will be exactly the same in all of the scenarios noted below:
No depreciation charged in the year of disposal
Depreciation charged in full up to, but not including, the month of disposal
Depreciation charged to the exact date of disposal
Depreciation charged in full to the end of the month of disposal
Every organisation should adopt a set of depreciation policies and apply them consistently. Whatever depreciation policy is adopted within the organisation, follow it and calculate the profit/loss on disposal afterwards.
Hi Rafal The answer is in Mike's words ''But why bother? Whether we do or we dont depreciate in the year of sale has no affect on profit for the year! If we dont depreciate, then profit (or loss) on disposal will be higher (or lower) than if we do depreciate by exactly the amount of the depreciation.''
Try a short worked example or two - one with no depreciation in year of disposal and one with a pro-rated amount. Post the entries to T accounts/do your double entry and see what impact they have on the profit. Then all will become clear. Post of here if you want them checking/are still struggling.
Joanne I would like to ask you for a favour. Can you give me some clues in relation to what I should do in example you recommended ? Can you give an exercise I should do ? I don't have too much experience to come up with exercise on my own. I can record depreciation-debit depreciation charges and credit accumulated depn. I can record sales of an asset -transferring carrying amount and accumulated depn to disposal account. I can record gain or loss on disposal. In order to understand why it makes no sense to record depreciation in the year of disposal you need better knowledge. Please give me some exercise so that while solving this exercise I can grasp why we don't need to record depreciation in the year of disposal.
