Key Concepts
Every transaction is recorded in two accounts — that is double entry. To interpret an account, check two things for each entry: whether it is a debit or a credit in this account, and the Particulars column, which names the other account in the entry. Together they tell you what the entry was for.
Reading the Non-current asset account (normally a debit balance):
| Entry side | What it means |
|---|---|
| Debit | The business bought the asset — paid by cheque, in cash, or on credit (Particulars: Cash at bank, Cash in hand, or Trade payables) |
Reading the Accumulated depreciation account (normally a credit balance):
| Entry side | What it means |
|---|---|
| Credit | The year's depreciation was added — net book value falls by this amount (Particulars: Depreciation of [asset]) |
Read the Particulars column — it names the other account. In the asset account, a debit (Cash at bank / Cash in hand / Trade payables) = bought. In the accumulated depreciation account, a credit (Depreciation of …) = this year's depreciation.
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X5 | ||||
| 1 Jan | Trade payables | 50,000 | 50,000 Dr | |
| 20X6 | ||||
| 1 Jan | Balance b/d | 50,000 Dr | ||
| 1 Jan | Cash at bank | 50,000 | 100,000 Dr | |
| 20X7 | ||||
| 1 Jan | Balance b/d | 100,000 Dr |
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X5 | ||||
| 31 Dec | Depreciation of motor vehicles | 5,000 | 5,000 Cr | |
| 20X6 | ||||
| 1 Jan | Balance b/d | 5,000 Cr | ||
| 31 Dec | Depreciation of motor vehicles | 10,000 | 15,000 Cr | |
| 20X7 | ||||
| 1 Jan | Balance b/d | 15,000 Cr |
- Balance b/d $50,000: Sundry & Co already owned motor vehicles costing $50,000 at the start of 20X6.
- Cash at bank $50,000: on the same day, the business bought additional motor vehicles costing $50,000, paying by cheque.
The year's depreciation of $10,000 was charged, so the net book value of the motor vehicles fell by $10,000 during 20X6.
In 20X5, depreciation was $5,000 on a cost of $50,000 (10%); in 20X6 it was $10,000 on a cost of $100,000 (10%). Since the depreciation amount stays at 10% of cost each year, the straight-line method is used.
Statement of Financial Position as at 31 December 20X6 (extract)
| Cost ($) | Accumulated depreciation ($) | Net book value ($) | |
|---|---|---|---|
| Non-current assets | |||
| Motor vehicles | 100,000 | 15,000 | 85,000 |
Reading a debit in the asset account as depreciation. A debit there means the business bought the asset; depreciation appears in the accumulated depreciation account.
Ignoring the Particulars column. The account named there tells you whether a purchase was by cheque (Cash at bank), in cash (Cash in hand), or on credit (Trade payables) — don't guess from the amount alone.
Using cost instead of net book value. On the Statement of Financial Position, deduct accumulated depreciation from cost to show net book value.