James A Business Person Started A Transport Business

James A Business Person Started A Transport Business With Two Cars Ta

James, a business person started a transport business with two cars, TA and TB, purchased in 2010 for Kshs 600,000 and Kshs 945,000 respectively. In 2012, vehicle TB was involved in an accident and was written off. In the same year, he bought two cars, TC and TD, for Kshs 800,000 each. In September 2013, he sold vehicle TC for Kshs 726,000. In January 2014, he purchased vehicle TE for Kshs 765,000. In March 2014, he purchased vehicle TF for Kshs 930,000. James depreciates vehicles at the rate of 25 percent on cost, on vehicles at hand at the end of each year, regardless of the purchase date. He does not provide depreciation for vehicles disposed of during the year. His accounting date is December 31st.

Paper For Above instruction

The term “accounting date” refers to the specific date at which a company's financial statements are prepared and summarized. It marks the end of a financial period (often a fiscal year) on which a business's financial position, performance, and cash flows are assessed. Typically, it is used to ensure consistency in financial reporting, facilitating comparisons over multiple periods. For James’s business, the accounting date of December 31st indicates that all financial activities, including depreciation calculations, are accounted for up to and including this date annually. Such a date serves as a snapshot point for compiling financial statements such as the income statement and balance sheet, aligning the business's financial activities with statutory requirements and enabling accurate assessment of its profitability and financial position.

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It reflects the reduction in value of the asset over time due to wear and tear, obsolescence, or aging. James’s method of depreciation involves applying a rate of 25 percent annually on the cost of the assets that remain at the end of the year, regardless of when they were acquired during the year. Notably, he does not account for depreciation related to assets disposed of within the fiscal year, which simplifies the calculation process but may have implications for the accuracy of profit reporting during those years.

To calculate depreciation for each year, a key aspect is understanding that depreciation is calculated on the assets remaining at the year-end. The unique approach James adopts involves applying a flat rate of 25% on the total cost of assets present at the end of each year, ignoring the purchase date within the year. This means that newly acquired assets are depreciated in full from the year of purchase, and disposed assets are not depreciated in the year of disposal, aligning with the rules provided.

Depreciation Calculations for the Years

Year 2010

James purchased TA for Kshs 600,000 and TB for Kshs 945,000. Since depreciation is on the cost of assets at year-end, both assets are included in the depreciation base.

- Total assets at year-end: Kshs 600,000 + Kshs 945,000 = Kshs 1,545,000

- Depreciation expense: 25% of Kshs 1,545,000 = Kshs 386,250

2010 depreciation: Kshs 386,250

Year 2011

Assets at the start of the year: TA and TB, valued at the same costs. Since no disposals or additional purchases occurred in 2011, the assets’ values remain.

- Assets at year-end: Kshs 600,000 + Kshs 945,000 = Kshs 1,545,000

- Depreciation expense: 25% of Kshs 1,545,000 = Kshs 386,250

2011 depreciation: Kshs 386,250

Year 2012

In 2012, vehicle TB was written off after an accident. As per instructions, depreciation is not provided for assets disposed of during the year.

Remaining vehicles at year-end: TA (Kshs 600,000), TC, TD (each Kshs 800,000).

Total assets at year-end: Kshs 600,000 + Kshs 800,000 + Kshs 800,000 = Kshs 2,200,000

Depreciation expense: 25% of Kshs 2,200,000 = Kshs 550,000

2012 depreciation: Kshs 550,000

Year 2013

In 2013, assets include TA (Kshs 600,000), TD (Kshs 800,000), TE (Kshs 765,000), and the remaining from previous purchases. Notably, vehicle TC was sold in September 2013 for Kshs 726,000; as per instructions, depreciation does not apply to assets disposed of during the year, so TC and TE are included at the year's end.

Remaining assets at year-end: TA (Kshs 600,000), TD (Kshs 800,000), TE (Kshs 765,000), and TF purchased in March 2014 does not count for 2013 depreciation.

Total assets at year-end: Kshs 600,000 + Kshs 800,000 + Kshs 765,000 = Kshs 2,165,000

Depreciation expense: 25% of Kshs 2,165,000 = Kshs 541,250

2013 depreciation: Kshs 541,250

Year 2014

In 2014, James purchases vehicle TF for Kshs 930,000, and vehicle TE remains. The seller of TC has been disposed of in 2013, so TC is not included.

At year's end, assets include TA (Kshs 600,000), TD (Kshs 800,000), TE (Kshs 765,000), TF (Kshs 930,000).

Total assets: Kshs 600,000 + 800,000 + 765,000 + 930,000 = Kshs 3,095,000

Depreciation: 25% of Kshs 3,095,000 = Kshs 773,750

2014 depreciation: Kshs 773,750

Conclusion

Applying the depreciation formula annually and considering the assets at point of year-end, James’s business records reflect increasing depreciation expenses coinciding with asset acquisitions and disposals. The consistent depreciation rate simplifies calculations but may not precisely match the actual decrease in asset value over shorter periods or for assets with varying useful lives. Nonetheless, this approach offers a straightforward method suitable for small business accounting frameworks, aligning with standard practices for real-world financial management and reporting.

References

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