Chapter 11 Flashcards
What is the difference between an expense and and asset?
expense is always a debit and represents something that is used up immediately. An asset is also a debit but generally can be used over a period of more than one yea
e.g. buying a car - asset
the petrol/servicing/repairs - expenses
What is the difference between a current asset and a non current asset?
Non-current asset: Assets used over a period of more than one year
e.g. land, buildings, computers, furniture
Current asset: Assets that continually flow through the business and are generally used within one year
e.g.
Receivables, Inventory, cash in bank, licenses/patent
Under non-current assets, what is the difference between tangible asset and intangible asset?
Intangible asset - has no physical existence but still has an ongoing value to the business
e.g. lincence/patent/goodwill
Tangible asset - a physical object that can be seen/touched
e.g. land/buildings/computers/furniture/motor vehicles
Where are non-current assets recorded?
Statement of financial position
What should the cost of an asset include?
All costs incurred bringing the asset into use (delivery, installation and set up)
EXCEPT cost of training staff - may not stay in business
Definition of depreciation
the spreading of the depreciable amount of an asset over its estimated useful life.
Depreciation spreads the cost of a non-current asset on a systematic basis over its useful life.
What is residual value?
Residual value is the value an asset is expected still to have at the end of its useful life. In practice, this is normally zero. Residual value and expected useful life will be estimates.
what is NOT definition of depreciation
Note that deprecation is NOT an attempt to arrive at the market value of the asset this is a common error in the exam.
How is depreciation charged?
To the statement of profit or loss
as an EXPENSE
unless otherwise stated:
depreciate from the month of acquisition to the month of disposal
What are the two common methods of depreciation?
Straight line (most common)
Reducing balance
Either way must be applied consistently
must be disclosed in the notes to the financial statements
General definition of straight line method
Charges the same amount of depreciation in each period
Calculation: depreciation - straight line method
(Cost-residual value)/Expected useful life
What is the DE for a non current asset?
Dr Non current assets
Cr Cash
What is the DE for annual depreciation expense? (straight line per year)
straight line - $N per year
Dr Depreciation expense (SPL)
Cr Accumulated depreciation (SFP)
cost vs depreciation expense per annum vs accumulated depreciation at year-end vs carrying amount (straight line)
cost always same - $26000 for car
depreciation expense per year $4000
accumulated depreciation at year end $4000, $8000, $12000 etc etc
Carrying amount $22000, $18000 etc etc
What is the equation for carrying amount?
Carrying amount = cost - accumulated depreciation
For depreciation in the statements, depreciation is shown where?
The carrying amount in Statement of Financial Position
Accumulated depreciation is always a credit balance that is deducted from cost in the SFP
What are other words for carrying amount?
Carrying value, net book value, NBV
start N end M, depreciation policy is to depreciated the asset on a straight line basis at 25% per annum
25% x (M-N) = $ blah per annum
25% x (26,000-10,000) = $4,000