17.6 Over-depreciation and profit on disposal
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17.6 Over-depreciation and profit on disposal
- 1. 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL
- 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL 2015 2016 2017 Cost $10,000 $2,000 $1,000 $500 Carrying Value $8,000 Carrying Value $7,000 Carrying Value $6,500 Sold for $7,500 here… $10,000 $0 Carrying value $6,500 Sold for $7,500 Profit on Disposal $1,000 Over-depreciated by $1,000
- 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Profit on disposal – where is it recorded in the Income Statement? Income Statement Revenue $ $ Sales 100000 less Cost of Goods Sold 25000 Gross Profit 70000 plus Other Revenue Adjusted Gross Profit 71000 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL Income Statement Revenue $ $ Sales 100000 less Cost of Goods Sold 25000 Gross Profit 70000 plus Other Revenue Profit on disposal on IT 1000 Adjusted Gross Profit 71000 “Profit on disposal” is recorded in Other Revenue
- 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use The different types of Revenue… Revenue – the major source of revenue for the business which comes from the revenue earned from selling stock Cash sales Credit sales Commission revenue Other Revenue – records the revenue earned from sources other than selling stock Discount revenue Interest revenue Profit on Disposal of NCA 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL
- 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Why is an adjustment needed for a Profit on Disposal? Carrying value Sold for 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL $10,000 $0 $6,500 What was recorded… $3,500Total Expenses = What should’ve been recorded… $10,000 $0 $7,500 $2,500Total Expenses =$3,500 $2,500 We’ve charged too much depreciation Need a $1,000 adjustment to make it right… $25,000Profit on Disposal = $1,000
- 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Why is an adjustment needed for a Profit on Disposal? 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL What was recorded… What should’ve been recorded… So, if a $1,000 Profit on Disposal was not recorded then: • Depreciation expense would have been $1,000 too high • Net Profit would have been understated by $1,000 Total Expenses = Total Expenses =$3,500 $2,500 $25,000Profit on Disposal = $1,000
- 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Which Accounting Principles and Qualitative Characteristics require the Profit on Disposal to be recorded? The $1,000 adjustment ensures that: Reporting Period Correct Expenses have been matched with Revenues 17.6 OVER-DEPRECIATION AND PROFIT ON DISPOSAL Relevance Net Profit is accurate which facilitates better decision- making What was recorded… What should’ve been recorded… Total Expenses = Total Expenses =$3,500 $2,500 $25,000Profit on Disposal = $1,000
- 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ12 X