13.1 How is the purchase of a non-current asset accounted for?

Question 1

What are non-current assets?

Answer 1

Assets that a business buys to help the business to generate income.

Question 2

What are non-current assets used for?

Answer 2

1. in the production or supply of goods or services;
2. for rental to others;
3. for administrative purposes.

Question 3

How long can businesses use their non-current assets for?

Answer 3

More than one year.

Question 4

What is the period of time a non-current asset is expected to be used known as?

Answer 4

Useful life.

Question 5

Give some examples of non-current assets.

Answer 5

1. Land
2. Property (Land and Building)
3. Office equipment
4. Fixtures and fittings
5. Motor vehicles
6. Plant and equipment

Question 6

How are non-current assets recorded?

Answer 6

At their original cost, which includes the amount incurred to get the asset ready for use.

Question 7

Why are non-current assets recorded at their original cost?

Answer 7

Because it is in accordance with the going concern and historical cost concepts.

Question 8

Revision: Chapter 1 (Page 13)

Explain the going concern concept.

Answer 8

The going concern concept assumes that the business has an indefinite economic life. As a going concern, the business will buy assets (for example, equipment, buildings) to help it carry out its operations in the long term.

Question 9

Are non-current assets expected to be sold off soon after they are acquired / purchased / bought?

Answer 9

No. They are acquired to help the business carry out its operations in the long term.

Question 10

Why are non-current assets usually recorded at historical cost (i.e. the price at which they were bought?)

Answer 10

Because they are not expected to be sold off soon after they are acquired. They are bought for use and not for resale.

Question 11

Revision: Chapter 1 (Page 13)

Explain the historical cost concept.

Answer 11

The historical cost concept states that transactions should be recorded at their original cost. The original cost is the amount reflected in the source documents, e.g. invoice.

Question 12

What is the journal entry for recording the purchase of non-current assets?

Answer 12

Dr Non-current assets (increase assets)

Cr Cash at bank or cash in hand (decrease asset) or trade payable (increase liability)