# Revision time – SOCI/SOFP (Level 1)

Again…. for those who really wants to study. You can print this and attempt this exercise.

 RM RM Dr Cr Sales and Purchases 61,900 287,600 Returns 1,750 1,010 Carriage inwards 2,500 Inventory 1.1.18 10,400 Equity 1.1.18 150,000 Salary 52,000 Rental 15,000 6,000 Interest 2,200 1,480 Stationery 2,750 Utilities 8,800 Insurance 1,520 Bad debt 2,400 Advertising 8,550 Premises 200,000 Furniture and fittings 15,000 Machinery 30,000 Receivables and payables 35,400 8,730 Bank 4,500 Cash 150 454,820 454,820

 Closing inventory as at 31.12.2018 is RM12,350 Depreciation for machine is to be provided at 20% using straight line method The owner took RM100 on a weekly basis throughout the year from the bank

Good luck

# Revision Time – SOCI/SOFP

Below is an exercise regarding the SOCI and SOFP. This in only an entry level, there will be to come as you can use this as your warm-up session.

Good luck

 RM RM Dr Cr Sales and Purchases 61,200 294,600 Returns 1,350 1,030 Carriage inwards 2,500 Inventory 1.1.18 10,400 Equity 1.1.18 100,000 Salary 48,000 Rental 15,000 6,000 Interest 2,200 1,800 Stationery 1,750 Utilities 3,200 Insurance 1,520 Bad debt 2,400 Premises 200,000 Machinery 30,000 Receivables and payables 35,400 8,640 Bank 3,000 Cash 150 415,070 415,070

To be continued….

# Depreciation – Part 4

Reducing balance method

I almost forgot that I haven’t finish the depreciation calculation for the above method. How about I use the previous example for this method as we can see clearly the difference between them. Just wait….

A machine cost RM80,000 acquired in 2016. The depreciation is 20% per annum using reducing balance method.

As you can see, the calculation doesn’t change much. It just that, the similarities of between the straight line and reducing balance is that, they have same depreciation figure for the first year. This is because, the cost will be the base for the calculation. Therefore, both method same the same figure ONLY for the first year.

As for the second year, the reducing balance method, takes the balance figure (Net book value), using it as the base. By using the net book value each year as the base to calculate the yearly depreciation, the annual depreciation will continue to decrease. Therefore, the expenses to be reported in the SOCI will be smaller and smaller every year. And also, the profit looks good too.

But…..

It all depends on the company policy and also the advice from the auditor. Companies always use the normal practice according to the industry. Whenever they want to change the method of depreciation, they have to ask for and advise from the auditor and they better have such a strong reason on why they want to change method.

Try to compare between those two. What would be the net profit in year 5, given the gross profit of RM50,000. Answers? Tell me in class.

# Depreciation – Part 3

Again….

There are two popular methods in calculating depreciation;

1. Straight line method
2. Reducing balance method

Straight line method

As stated by its name, straight line refers to the recurring figure over and over the year throughout its useful life. Of course the asset has its useful life as stated in my posting previously. For example;

A machine costing RM80,000 acquired in 2016. The useful life of the machine is 5 years. Then, the depreciation calculation is to get the cost of the machine and divided by the total number of years expected (useful life).

The calculation would be RM80,000/5 years = RM16,000  per year. This RM16,000 is the annual depreciation charged to the Profit and Loss Account in the expenses section for the next 5 years. Clear example will be as below;

See! every year will be the same depreciation figure. That is why we called this a straight line method.

Now, for another example,

A machine cost RM80,000 acquired in 2016. The expected useful life of the machine is 5 years and at the end of year 5, the machine is expected to have a secondhand value of RM10,000. Then the depreciation calculation will be as follow,

Since the depreciation charged is RM14,000 every year, then it is a straight line method. Because the same figure keeps recurring every year.

Another example…

A machine cost RM80,000 acquired in 2016. The depreciation is 20% per annum using straight line method. Here, the question is clear, it states the depreciation method. So the depreciation calculation will be much simpler.

Last one, many huh!

A machine cost RM80,000 acquired in 2016. The depreciation is 20% at cost. It doesn’t state the depreciation method as well as useful life. The question is silent. Logically, if the depreciation is at cost, then the calculation should always refer to the cost. Just follow the same calculation as above.

Ok see you later!

# Depreciation – Part 2

There are also other reasons for depreciation and that are

• Obsolescence
• Wear and tear
• Perishability
• Usage right
• Natural causes

Obsolescence

It comes from the word obsolete. Do you know what is typewriter. If you don’t know, I suggest you can browse the net and take a look at the thing. Years ago, people use that to type letters etc. And now, people seldom use that unless you have a power failure or a times of emergency. It is now being replaced by the computer. We can say that the typewriter is now obsolete and may cause inefficiency.

Wear and tear

Things will be old. Humans also growing old and older by the day. Like I was saying previously, you purchased a mobile phone and the usage of the mobile phone will eventually makes the phone looks old. Even when you have a new car today, what will your car looks in the next 5 years? Clothes…the colour will gradually changed and end up as a cloth for wiping tables!

Perishability

Some asset has a very short life span. Mostly applicable to inventory. Did you notice that there is an expiry date on the bottle of milk you purchase from the convenient store or a loaf of bread, there must be an expiry date. That time limit is also the sign of depreciation. Of course the milk is still fresh within the period and  still safe to drink until the last date. But do you want to drink a milk that will expire tomorrow.? I don’t think so…

Usage right

The usage right is quite similar to the above concept. We take a software for example. Sometimes you purchase a program at a very high cost but the usage is only for a couple of years. So the software will be self terminated at due time. For instance, like any other antivirus software…it lasts only one year. then it will continue to updating new database as you extended or purchased new license.

Natural causes

Erosion, rust, rot and decay, that are some of the natural causes that cause the depreciation. Land facing erosion, steel rust, wood will rot and teeth will decay. We cannot stop that because its natural. So everything depreciates.

# Depreciation – Part 1

Why depreciate?

As you all know, it is because of time. Will you be young forever? I don’t think so unless you are immortal. Humans ageing every minute of their life. Same goes to non-living things. They grew older and older through time.

So…Assets. We have current and non-current assets. The one that we will focus on is the non-current assets. This is because the business use these assets to generate income and in their operations. Still remember what are the things in the non-current assets? They are land and building, pant and machinery, fixtures and fittings, motor vehicles and office equipment. All these things the business use to generate income, which they owned, possess and control.

Simple example for depreciation, let say, you bought a mobile phone last January 2017 for RM3,000 and then you want to sell it to your friend in December 2017. How much you think you can sell it? Can you sell it for RM3,000 same as you purchased the mobile phone a year ago? Well, if you succeed to sell it for the same price you bought it at RM3,000, congratulations! Maybe that person either crazy or want to win your heart or maybe that person is on drugs! If you ask me, how much would I take it, of course, I would happy to purchase it from you for RM800-RM1,000.

Why?

Because the phone is considered a second hand item. It is already being used. Probably it might fell down from a cliff or something and not to mention, the owner of the phone always bring the phone to the toilet for whatever reasons…

The difference between the original price (cost price) and the current value is what we called depreciation. Original cost is RM3,000, the secondhand value is RM1,000. The difference is RM2,000 is depreciation. That is the cost of using the asset.

That is the simplest explanation for depreciation.

So tune in for the next episode. Later! Chiow!