Prepare and maintain accounting records related to non-current assets (valuation, depreciation and disposal)

When a non-current asset is first acquired, it is measured at cost. This includes not only the purchase price but all costs necessary to bring the asset to its intended location and condition for use.

Costs included in the initial measurement:

• Purchase price of the asset
• Costs directly attributable to bringing the asset to its location and condition (transport, installation, legal fees)
• Initial estimation of costs of dismantling and removing the item and restoring the site

Costs NOT included:

• Administration and general overhead costs (e.g., office rent)
• Costs of launching new products or services (advertising)
• Expenses of opening new business facilities
• Costs of relocating
• Initial losses before the asset reaches its intended use
• Errors in bringing the asset to required condition

Accounting entry for acquisition:

After initial recognition, an entity must choose either the cost model or revaluation model for measuring non-current assets. The chosen model applies to an entire class of PPE.

Cost Model

The asset is carried at its cost less any accumulated depreciation and any accumulated impairment losses. This is the most common approach.

Revaluation Model

The asset is carried at a re-valued amount (fair value at the date of revaluation) less subsequent accumulated depreciation and impairment losses. Revaluation is only possible when the fair value can be measured reliably, usually through registered property valuers.

Accounting for revaluation:

• If value increases: The increase is recognized in other comprehensive income and accumulated in equity as revaluation surplus (to the extent it reverses a previous decrease recognized in profit or loss).
• If value decreases: The decrease is recognized in profit or loss. However, if there is a credit balance in revaluation surplus for that asset, the decrease is first offset against that surplus, with any remainder going to profit or loss.

Depreciation is the systematic allocation of the depreciable amount of a tangible non-current asset over its useful life. It represents the reduction in an asset's value due to wear and tear, deterioration, obsolescence, and the passage of time.

Depreciable amount = Cost of asset − Residual value

Key terms:

• Useful life: the period over which an asset is expected to be available for use, or the number of production units expected from the asset.
• Residual value: the estimated amount that would be obtained from disposing of the asset at the end of its useful life, after deducting estimated disposal costs.

Why depreciation is charged:

• To match the cost of an asset with the revenue it helps generate (matching principle)
• To present a true and fair view of the company's financial position
• To comply with accounting and tax regulations
• To reflect the gradual reduction in an asset's useful capacity

Causes of depreciation:

1. Physical deterioration: wear and tear, rust, decay, erosion
2. Economic factors: obsolescence (asset becomes outdated) and inadequacy (asset cannot meet increased demand)
3. Time passage: especially for assets with legal life limits (e.g., leases)
4. Depletion: for natural resources

1. Straight-Line Method

This method results in a constant depreciation charge over the useful life.

Formula: $\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Example: TANAPA Company Ltd bought machinery for TZS 260,000,000 plus transport and installation of TZS 20,000,000. Useful life is 6 years, residual value is TZS 10,000,000.

• Total cost = 260,000,000 + 20,000,000 = TZS 280,000,000
• Depreciable amount = 280,000,000 − 10,000,000 = TZS 270,000,000
• Annual depreciation = 270,000,000 ÷ 6 = TZS 45,000,000 per year

Carrying values:

2. Diminishing Balance (Reducing Balance) Method

A higher depreciation charge is recorded in early years, decreasing over time. It applies a percentage to the carrying value (cost minus accumulated depreciation).

Formula: $\text{Depreciation} = \text{Carrying Value} \times \text{Depreciation Rate}$

Example: Sunflower Limited purchased machinery for TZS 100,000,000. Useful life: 4 years, residual value: TZS 12,960,000. Depreciation rate: 40%.

Rate formula (when given residual value): $r = 1 - \sqrt[n]{\frac{S}{A}}$ Where S = residual value, A = cost, n = useful life

3. Units of Production Method

Depreciation is based on actual production or usage, suitable when benefits are proportional to output.

Formula: $\text{Depreciation per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Units}}$

Annual Depreciation = Depreciation per Unit × Actual Units Produced

Example: Chapakazi Ltd bought a machine for TZS 100,000,000. Residual value: TZS 20,000,000. Estimated total output: 800,000 units.

• Depreciation per unit = (100,000,000 − 20,000,000) ÷ 800,000 = TZS 100 per unit

4. Sum of Years' Digits Method

Accelerated method charging higher depreciation in early years.

Formula: $\text{Depreciation} = \frac{\text{Remaining Useful Life}}{\text{Sum of Years Digits}} \times \text{Depreciable Amount}$

Sum of years digits = n(n+1)/2, where n = useful life

Example: Kibaba Ltd purchased an asset for TZS 30,000,000, useful life 5 years, no residual value.

• Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 or (5 × 6)/2 = 15
• Depreciable amount = 30,000,000

Depreciation is recorded using two main accounts:

1. Depreciation Expense Account (income statement) – shows the depreciation charged for the period
2. Accumulated Depreciation Account (balance sheet) – cumulative depreciation to date

Journal entries:

Example: Mr. Mwakangale purchased a Valmet tractor for TZS 80,000,000 on 1st April 2022. Useful life: 10 years, residual value: TZS 20,000,000. Straight-line method. Financial year ends 31 December.

• Annual depreciation = (80,000,000 − 20,000,000) ÷ 10 = TZS 6,000,000
• For 2022 (9 months): 6,000,000 × 9/12 = TZS 4,500,000

Tractors Account:

Accumulated Depreciation Account:

Depreciation Expense Account:

Disposal occurs when an asset is sold, exchanged, discarded, or derecognized. The main steps are:

1. Remove the asset at cost from the books
2. Remove accumulated depreciation relating to that asset
3. Record proceeds (cash received or receivable)
4. Calculate and record gain or loss on disposal

Gain/Loss Calculation: $\text{Gain or Loss} = \text{Proceeds} - \text{Carrying Value (Net Book Value)}$

• If proceeds > carrying value = Gain
• If proceeds < carrying value = Loss

Disposal at End of Useful Life

Example: Wananchi Company sold a motor vehicle for TZS 3,000,000 on 31 December 2024. Cost: TZS 15,000,000, accumulated depreciation: TZS 12,500,000.

• Carrying value = 15,000,000 − 12,500,000 = TZS 2,500,000
• Proceeds = TZS 3,000,000
• Gain = 3,000,000 − 2,500,000 = TZS 500,000

Journal entries:

Disposal Before End of Useful Life

When disposing before the end of useful life, ensure depreciation is provided up to the date of disposal.

Example: Jitegemee Company sold a machine for TZS 5,500,000 on 1st April 2022. Machine bought 4th July 2019 for TZS 15,000,000. Useful life: 5 years, no residual value. Straight-line method.

Depreciation calculations:

• 2019 (half year): 15,000,000 × 1/5 × 6/12 = TZS 1,500,000

• 2020 (full year): TZS 3,000,000

• 2021 (full year): TZS 3,000,000

• 2022 (3 months): 15,000,000 × 1/5 × 3/12 = TZS 750,000

• Total accumulated depreciation: TZS 8,250,000

• Carrying value = 15,000,000 − 8,250,000 = TZS 6,750,000

• Proceeds = TZS 5,500,000

• Loss on disposal = 5,500,000 − 6,750,000 = TZS 1,250,000

A small business owner in Dar es Salaam who runs a transport company with two minibuses needs to maintain accounting records for these non-current assets. By applying the straight-line method, they will calculate annual depreciation to properly match the vehicle costs against the revenue earned over each year. When a minibus is sold or traded in after several years, the owner will use the disposal accounting process to determine whether a profit or loss was made—this helps in making informed decisions about when to replace vehicles and how much to budget for new purchases, ensuring the business maintains accurate financial records for tax purposes and loan applications with local banks.