10. Non-current asset Flashcards
Define capital expenditure
Capital expenditure is the cost to buy and bring the non-current assets to their intended use.
Define revenue expenditure
Revenue expenditure is the cost to operate, repair and maintain the non-current assets in working condition.
Distinguish 2 differences between capital and revenue expenditure
Capital expenditure is costs to buy and bring the non-current assets to their intended use while revenue expenditure is costs to operate, repair and maintain the non-current assets in working condition.
Capital expenditure is recorded in the statement of financial position as non-current asset while revenue expenditure is recorded in the statement financial performance as an expenses.
Capital expenditure benefits business for more than one year while revenue expenditure benefit business within on year.
What is the effect of wrong classification of capital expenditure as revenue expenditure on expenses, profit, equity and nca?
expenses, profit and equity overstated and NCA will be understated
What is the effect of wrong classification of revenue expenditure as capital expenditure on expenses, profit, equity and nca?
Expenses, profit and equity understated and NCA will be overstated.
Explain, using an accounting theory, why a item bought which is a non-current asset in nature is treated as an expense.
According to materiality concept, relevant information should be reported in the financial statements if it is likely to make a difference to the decision making process. So if the amount spent on the non-current asset is insignificant to the decison-making when compared to the size of the income, profit, asset or equity of the business, it does not need to be reported in the statement of financial position as a non-current asset. Instead record it as a revenue expenditure in the statement of financial performance as an expenses.
How to find the cost of purchases for the non-current asset
Cost of non-current asset = purchases price of non-current asset + amount incurred to get asset ready for use (ie total capital expenditure of non-current asset)
Define depreciation
Depreciation is an allocation of the cost of the non-current asset over its estimated useful life.
Explain with an accounting theory, why business needs to charge depreciation?
According to matching concept expenses incurred must be matched against income earned in the same period to determine the period for that period. Hence business charged depreciation an expenses to matched the income earned from using the non-current asset in the same period to determine a true and fair profit for the year.
According to the prudence concept, business should not overstate profit and asset, and should not understate its losses and liabilities. Hence business provides depreciation for non-current assets as expenses and reduce the value of non-current asset so as not overstate it’s profit and asset.
State one cause of depreciation.
usage, wear and tear, obsolescence, legal limit
Explain why it is more suitable to use reducing balance method to calculate deprecation for motor vehicle?
In the earlier years, the NCA is heavily used as it benefits the business more, it is more efficient and has less repairs and maintenance expenses, hence a higher amount of depreciation expenses is recorded in the earlier years and depreciation amount reduces as time goes by.
Explain why it is more suitable to use straight-line method to calculate deprecation for fixtures and fittings?
The NCA provide equal benefit to the business throughout its estimated useful life, hence it is assume to depreciate at an equal amount each year.
What is the effect of depreciation on expenses, profit, equity and NCA?
Expense increase, profit, equity and NCA decrease
State the double entries for for depreciation
Dr Dep
Cr Acc Dep
Profit and net book value decrease by …………… amount in the earlier years for reducing balance method of depreciation.
Higher
