How to Adjust for Past Depreciation Not Taken
Depreciation is the loss of value of a tangible asset during its useful economic life. It is a cost that is must be accounted for as an expense in the financial reports of a business. However, circumstances may arise when depreciation of an asset may be omitted in the financial reports of the business. Such omissions must be calculated and posted appropriately to avoid overstating your business' asset value. The calculation of depreciation is based on either the straight line method or the reducing balance method. The straight line method involves allocating equal amount of depreciation in each accounting period, whereas the reducing balance involves high depreciation charges in the initial years, which is gradually reduced over the years with the aging of the asset.
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Instructions
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Identify the method that your business applied in calculating depreciation in the previous accounting periods. The chosen method applied in depreciating assets must be consistent from one accounting period to another.
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Refer to a copy of the annual reports for the previous year to identify the method and rates depreciation that were used to calculate the depreciation of assets. Allocate the amount of depreciation for the year if you are using the straight line method. Multiply the percentage of depreciation for the year by the value of the asset recorded in the previous year, if you are using the reducing balance method.
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Write a journal voucher with the description "entry of depreciation not recorded," and post the omitted depreciation charge as a debit entry. Credit the provision for depreciation account for every omitted item. Have the journal approved by the top management of the business.
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Post the adjusted figures of the journal voucher in the general ledger. This adjusts the value of each of the tangible assets accordingly in the fixed assets section of the balance sheet. You have adjusted past depreciation omitted from the books of accounts.
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Tips & Warnings
Clarify the type of depreciation method applied on each asset if the omitted depreciation charge affected a number of assets. This helps avoid further complications when calculating the depreciation charge for each of the asset.
Tax liability will be higher if all expenses are not recorded, and this comes with the consequence of reducing the net profit that is to be attributed to the owners of the business.
