Accounting for NCA Flashcards
[Accounting for NCA]
Advise TYX Limited on why the distinction between capital and revenue expenditure is important when preparing financial statements.
1st mark - Definition
2nd - Impact on SOPL
3rd - Impact on SOFP
- Capital expenditure is charged over consecutive accounting periods in accordance with the matching concept.
- If the capital expenditure was included in SOPL, the profit for the year would be understated.
- and the asset where in the SOFP would be understated.
- Revenue expenditure should be entered in the SOPL as an expense.
- If the expenditure was placed in the SOFP, profit for the year would be overstated
- The asset total in the SOFP would be overstated.
- This would contravene with the prudence concept.
[Accounting for NCA]
Definition of depreciation
The cost allocation of a non-current asset over its expected useful economic life.
[Accounting for NCA]
Factors of Depreciation
- Wear and tear
- Obsolescence
- Technological changes
- Depletion
- Passage of time
- Economic factors
[Accounting for NCA]
Purpose and accounting concept.
Hint: 3 concepts
Depreciation is an application of the
- Matching concept
To match the cost of an asset with the income generated by the assets over each accounting period. - Prudence concept
To ensure the valuation of the non-current assets are not overstated after a period of use. - True and view concept
Depreciation is provided so that the valuation of assets is stated at a reasonable amount in the statement of financial position.
[Accounting for NCA]
Choice of depreciation method; Straight line.
- Most appropriate when the asset is expected to earn revenue evenly over its useful life.
- Lose value more consistently over their lifetime
- The asset has a clearly defined fixed life
[Accounting for NCA]
Choice of depreciation method; Reducing balance.
- Earning power of the asset is expected to diminish with age.
- Often loses more value in the earlier years of its life due to usage.
- May equalise the charge against profits each year when repair and maintenance costs are taken into account.
[Accounting for NCA]
Explain two accounting treatments for loose tools.
- It is written off as an expense if the cost of the item is not material.
- The revaluation method should be used if the cost is significant.
[Accounting for NCA]
Define capital expenditure.
A payment to purchase a non-current asset for one-off payment
[Accounting for NCA]
Explain the purposes of general journal. State examples of transactions recorded in the journal.
- It is used to record the double entry
of non-routine transactions. - Purchase of NCA on credit
- Sales of NCA
- Correction of errors
- Irrecoverable debts
[Accounting for NCA]
Why businesses provide for depreciations on their non-current assets.
- Depreciation is the allocation of a cost of non-current asset over its expected useful life.
- It is an application of matching concept.
- Recongnising depreciation matches the cost of non-current asset to the income generated by it over each accounting period.
- Depreciation reduced profit and presents the value of the non-current assets from being overstated.
- This is in accordance of purdence concept.
- The valuation of then NCA is thereby stated at a reasonable amount in the SOFP, showing a true and fair view of those NCA
[Accounting for NCA]
Advice Miu of the effect on her financial statements if she had NOT part-exchanged the motor but had sold it for $80000 cash.
SOPL
- Loss on the disposal increases
- Loan interest increases
- Profit for the year decreases
SOFP
- Amount of loan oustanding increases
- Owner’s capital reduces
- Net assets reduces
[Accounting for NCA]
Define capital receipts.
Any money received that is not from a normal trading activities
[Accounting for NCA]
Advantages and disadvantages of using reducing balance.
Advantages
- Provides a more realistic charge against profits
as some assets lose more value in their first years
as the asset reduces in value so the depreciation charge reduces.
Disadvantage
- Is more complicated to calculate
as the charge changes each year because it is based on the decreasing net book value at the beginning of each year.
[Accounting for NCA]
Why some bussinesses may use revaluation method of depreciation.
- Is used when the non-current asset consists of many items each of small value
making it impractical to calculate depreciation charge on each item.
[Accounting for NCA]
State how an annual depreciation charge is calculated using revaluation method
By comparing the closing valuation of the non-current asset with the opening valuation
