FIXED ASSETS
Depreciation is the process of distributing the cost of an asset - less any residual value - over its working life, on a defined basis, ie, a process of allocation, or of valuation.
Depreciation does not, of itself, provide any cash for replacement. Such cash can come from a sinking fund, the amount of cash being related to the annual depreciation charge.
Such a cash transfer is based upon the purchase price, not the replacement price, so, without interest from investment outside the business, it will not provide enough funds for full replacement.
The principle methods of depreciation are as follows:
Fixed instalment system (straight-line method) calculated by: cost of asset less scrap value divided by the estimated years of life.
Reducing balance system: A fixed percentage is taken each year from the reducing balance.
Revaluation method: The asset is revalued annually, and the adjustment charged to profit-and-loss account. (Your tax consultant should be consulted before applying this method.)
Machine hour method: Depreciation is a function of use. The life of the asset is calculated in hours, or miles, or other conventional units, and each unit is given an appropriate money value for depreciation purposes. (Your tax consultant should be consulted before applying this method.)
Replacement values systems, or value to the business: A theory has developed that assets should be depreciated in such a way that the cost of replacement is provided against the asset during its life. During times of inflation, the provision can therefore exceed the cost value of the asset.
Bank Reconciliation
While the business is keeping a record of its transactions with the bank, the bank is doing the same - reversing the entries. It is usual to reconcile the balance shown by the bank with the balance shown in the business's cashbook periodically (usually monthly).
There will be disparities. They will either be differences by error, or differences in time. Error corrections are made in the books of the business (assuming that it made the error). Time differences are listed, reconciling the bank statement with the corrected cashbook. For example:
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| Balance per cashbook: | |
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910.75 |
| Balance per bank statement: | |
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1240.25 |
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| The cashbook has an omission on the debit side of | |
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80.00 | |
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| Cheques paid in not yet credited by bank amount to | |
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315.95 | |
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| Cheques drawn not yet presented to an amount to | |
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565.45 | |
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| This is solved as follows: | |
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| Cash Book balance brought forward | |
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910.75 |
| Add: Correction of omission in cash book | |
80.00 | |
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| Corrected balance | |
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990.75 |
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| Balance per bank statement | |
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1240.25 |
| Add: Cheques paid in, not yet credited | |
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315.95 | |
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| Less: Cheques not yet presented | |
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565.45 | |
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(249.50) |
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990.75 |
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