Answer / shubhangi

Depreciation expense is calculated utilizing either a
straight line depreciation method or an accelerated
depreciation method. The straight line method calculates
depreciation by spreading the cost evenly over the life of
the fixed asset. Accelerated depreciation methods such as
declining balance and sum of years digits calculate
depreciation by expensing a large part of the cost at the
beginning of the life of the fixed asset.

What is Depreciation?
Depreciation is defined as an accounting methodology which
allows an organization to spread the cost of a fixed asset
over the expected useful life of that asset. The cost of
the fixed asset immediately comes out of the cash account
of the organization and is entered as an asset for the
organization. At the end of each period of the useful life
of the asset a part of the cost is expensed. This amount is
added to the accumulated depreciation for the asset. The
net value of the asset on the books of the organization is
the asset account less the accumulated depreciation
account.

A fixed asset is considered depreciable if it will wear out
or become obsolete over a period of years. The period of
years is called the life or the useful life of the item.
The life that is assigned to an item will depend on
industry standards, management standards, and governmental
regulations. Generally, depreciable items include
buildings, manufacturing equipment, office equipment, and
vehicles. Land is not considered a depreciable item as it
does not wear out or become obsolete.

Some fixed assets may be expected to have a market value at
the end of their useful life. This expected value is called
the salvage value. Some organizations set this value on a
per asset basis, some use a percentage of the purchase
price, some assume that all assets will have zero salvage
value, and some use a combination of these methods.

Organizations usually set a price at which a fixed asset is
considered depreciable. Any asset purchased at less than
the set price is immediately expensed. This eliminates the
need to track every waste basket, stapler, hammer, wrench,
desk lamp, etc. Some organizations set this as low as
$100.00. Other organizations set it at $10,000.00 or more.
Once this limit has been set it should be adhered to and
should not be reset every year

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The following information is extracted from the audited books of accounts of a chain of food stores for the period ended 31st December 2015. Revenue Statement (Trading and Profit and Loss Account for the year ended 31st December 2015. BWP’000 BWP’000 Sales 460 Cost of good sold (220) Gross profit 240 Wages 50 Other expenses 30 (80) Net Profit 160 Note: The purchase figure included in the cost of goods sold of P255 000. Balance Sheet as at 31st December 2015 BWP’000 BWP’000 Fixed Assets 400 Current assets: Stock 80 Debtors (trade) 120 Bank 400 ----- [600] Current liabilities: Trade creditors 300 ------ [300] 300 Net Assets 700 ==== Financed by: Share capital 600 Revenue reserves 100 ------ 700 Shareholders Funds 700 ===== Required: (a) Calculate the following accounting ratios: (i) Current ratio (ii) Acid test ratio (iii) Stock turnover (in days) (iv) Debtors turnover (in days) (v) Creditors turnover (in days) (vi) Return on capital employed (ROCE) (vii) Gross profit percentage (viii) Net profit percentage (b). Give a brief comment on the performance of the company, based on the above ratios.

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steps for finalisation of accounts and related entries

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