09 April 2012
Company claims depreciation on SLM basis.
Depreciation in the CY has been booked on WDV in the current year. During assessment...the mistake and the difference will be accepted for disallowance.
In the next year...how to reverse the extra depreciation and what treatment to give to reverse the closing balances (WDV of the asset as per SLM basis)....?!?
21 July 2024
If a company claims depreciation on a Straight Line Method (SLM) basis but inadvertently books depreciation on a Written Down Value (WDV) basis in the current year, causing an overstatement of depreciation, here's how to rectify it:
### Rectifying Overstatement of Depreciation:
1. **Reversing Extra Depreciation:** - In the next financial year, you need to reverse the extra depreciation that was incorrectly booked on WDV basis. - Calculate the difference between the depreciation that should have been charged on SLM basis and what was actually charged on WDV basis. - Debit the Depreciation Expense account to reverse the excess depreciation booked. - Credit the Accumulated Depreciation account (or Depreciation Reserve account if used) to reduce the accumulated depreciation to the correct level.
2. **Adjusting WDV Balances:** - After reversing the excess depreciation, adjust the WDV balances of the assets. - Calculate the correct WDV as per SLM method for each asset at the beginning of the next financial year. - Update the WDV of each asset in the books accordingly. - Ensure that the correct WDV is reflected in the Fixed Assets Register or relevant records.
### Going Forward:
1. **Consistent Method:** - Decide whether to continue with the SLM method or switch back to WDV method as per your company's policy and compliance requirements. - It's important to maintain consistency in the depreciation method applied to ensure accuracy in financial reporting and compliance with accounting standards.
2. **Documentation:** - Document the reasons for any changes in depreciation method or corrections made to ensure transparency and support during audits or assessments.
### Conclusion:
In summary, to rectify the situation: - Reverse the excess depreciation booked in the next financial year. - Adjust the WDV balances of the assets as per the correct depreciation method (SLM) going forward. - Maintain consistency in applying the chosen depreciation method to ensure accuracy and compliance in financial reporting.
If there are specific regulatory requirements or company policies that influence the choice of depreciation method, those should be adhered to and documented appropriately.
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