Chapter 11 Accounting for non-current assets (depreciation ) Flashcards
What is depreciation?
It is the part of a cost of a non-current asset that is consumed by a business during the period it is used by the business.
What are a few causes of depreciation?
Wear and Tear - assets become worn out through the use
Obsolescence - Assets have to be replaced because new, more efficient technology has been developed.
Passage of time - An asset acquired for a limited period of time, such as a lease of premises for a given number of years, lose value as time passes.
Exhaustion - For example, mines, quarries, and oil wells depreciate as the resources are extracted from them.
What is the accounting treatment for NCA?
According to the matching principle, the cost of the asset used up in the accounting period must be matched against the revenue the asset generates for the business in the same period. Therefore the depreciation expense is debited to the income statement and added to the provision for depreciation in the sofp.
When should a business use the straight-line method of depreciation?
It should be used for assets that are expected to earn revenue evenly throughout their useful years or whose value will decline gradually over their useful lives.
When should a business use the reducig balance method of depreciation?
It should be used when the assets earning power will diminish as the assets get older. It is also used when the asset loses more of its value in the early years of it’s life.
Explain the use of the consistency principle in depreciation.
The chosen method of depreciating assets should be used consistently to ensure that the profits or losses of different periods of account can be compared.
how to account for the disposals of an NCA?
When an NCA is sold. The profit or loss is calculated in a disposal account.
Step 01 - Credit the NCA account and Debit the disposal account. This will remove the cost of the asset sold from the ledger.
Step 02 - Debit the provision for the depreciation account and credit the disposal account with the depreciation provided to date. This will remove from the ledger the accumulated depreciation charged on the asset.
Step 03 - Debit the bank account and credit the disposal account, with the proceeds from the transaction.
How do you account for the part exchange of an NCA?
The part exchange value of the asset being disposed of is debited to the NCA and credited to the disposal account as the proceeds of the disposal.
What are the concepts associated with depreciation?
Prudence - If the cost of using the NCA was not included in the income statement, profit would be overstated.
