I've got a course question which is driving me bonkers – please help.

If the company bought an asset, lets say a car, for 20,000 in January 2009. They have decided to depreciate it at 20% of original purchase price per year.

On the balance sheet for the end of that year 09-10 (assume year runs from 01 Jan – 31 Dec), would you include the first year's depreciation e.g. record the car as being worth 16,000?

Or would you assume that depreciation hasn't happened until its 1st birthday and so record it as being worth 20,000?

Please help!

You are right that you would charge the depreciation in the first year/period (if purchased at the end of Jan and used from Feb then you may consider 11 months depreciation).

It is to reflect the cost of the asset over its useful economic life and can be reflected monthly (management accounts) or annually (year end statutory accounts).

At the end of the accounting period the car will be worth less than when it was first bought therefore you will need to adjust it's value to reflect this.

As ruddy says depending on whether you are preparing monthly accounts or year end accounts will alter the amount of depreciation i.e. 11 or 12 months worth.

I would suggest that in your course question the answer would be:

New car cost £20,000
Less Depreciation @ 20% -£4,000
Net Book Value at year end £16,000

But if bought at 1st of Jan than it had full 12 months depreciation. The way we have to do it on my course is that at the end of the year the figure in the Balance Sheet would be at cost so 16k and the charge goes through the IS, so You charge the depreciation straight away and not after a year or two.

However as ruddy said they might sometimes play with the purchase dates and You would have to charge less than 12 months depreciation if the asset was bought sometime during the financial year, which may not be so obvious at first, so check the purchase dates and year end dates to know how many months depreciation has to be charged. 🙂

As per crispy bacon. Your course isn't going to start teaching you to 'massage' the figures yet.

Thanks folks, looks like I am on the right track. At least my assets and liabilities now balance : 😀

not an accountant but used to reading them – would have thought the asset would go into a capital allowance pool in the financial yr of purchase so if bought in jan 09 and yr end is dec 31`st 09 then can't be depreciated until end 2010 when you appy the allowed rate to the pool

of course the value of the car is purely notional = book value and equals on balance sheet what is allowed by tax rules not the realisable value which may be a lot less

why you are thinking of tax when the question states balance sheet i have no idea.

edit: infact the thread title quite clearly states….

antigee – No.

because would normally expect balance sheet to reflect tax rules on asset values as this is consistent and reasonable

ok i'm wrong

What antigee says is potentially correct however the question geoffj was asking was relating to the Balance Sheet not the Tax computation.

Anyhoo in a Capital Allowance computation the car would be noted as a separate item as the value exceeds £12,000 & not in the general Capital Allowance pool.