6. Depreciation Flashcards
What is depreciation?
The charging of the cost of a non-current asset over its useful life.
In which statement is depreciation expense shown?
The Statement of Profit or Loss.
What is straight line depreciation?
Where depreciation is charged at a fixed amount each year.
How is the depreciation charge calculated for the straight line method?
(Original cost - residual value) / estimated useful life
What is reducing balance depreciation?
When the depreciation charge has a logarithmic progression over time.
Depreciation charge becomes progressively lower each year.
What is the accounting entry to charge depreciation?
- Debit Depreciation Expense account.
- Credit Accumulated depreciation account
On which statement is the depreciation expense account shown?
The Statement of Profit or Loss.
On which statement is the accumulated depreciation account shown?
The Statement of Financial Position.
When might a company choose to revaluate a non-current asset?
When the value of said asset is in excess of their net book value (carrying value).
What may cause a non-current asset to be in excess of their net book value?
A period of high-inflation.
What is profit from revaluation called?
Unrealized profit.
The asset has not been sold, so no real profit has been made.
When selling a non-current asset, what is the profit or loss on sale?
The difference between the proceeds of the sale, and the value in the financial statements.
When selling a non-current asset, what is the accounting entry for the cost of the asset sold?
- Debit Disposal account
- Credit Asset account
When selling a non-current asset, what is the accounting entry for the accumulated depreciation on the asset sold?
- Debit Accumulated depreciation account
- Credit Disposal account
When selling a non-current asset, what is the accounting entry for the proceeds of sale?
- Debit Cash
- Credit Disposal account
When selling a non-current asset, what is the accounting entry for the disposal account once all other entries are made?
It should be transferred to the SoPL.
Where is profit from revaluation of a non-current asset shown?
Separately from the SoPL, in a revaluation reserve.
In regards to IAS 16, what must happen when an item in property, plant or equipment is revalued?
The entire class of property, plant and equipment to which the asset belongs must be revalued.
Does depreciation charge change when an asset has been revalued?
Yes, the future charge should be based on the revalued amount and the remaining economic life of the asset.
What is a non-current asset register?
A record of the detailed information related to non-current assets.
It is not part of the double entry system.
What information is included in the non-current asset register?
- Cost of each asset
- Date each asset was purchased
- Accumulated depreciation for each asset
- The depreciation method used
- The estimated residual value of each asset
- Supplier’s information and item’s serial number
- Physical location of the asset
- Date the asset was last inspected
- Date the asset was scrapped or sold
