chapter 12 - depreciation & disposal of nca Flashcards
definition of:
depreciation
an estimate of the loss in value of nca over its expected working life
-cost of nca is spread over the years
matching principle for depreciation?
- cost of nca is not charged as an expense
- cost of nca is spread over the years which benefit from the use of asset
prudence principle for depreciation?
- depreciation for the year is included in the expenses in the income statement so profit for the year is not overstated and nca shown at a more realistic value
- nca recorded at a figure less than cost price (net book value) in statement of financial position
causes for depreciation
- economic reasons (nca becomes inadequate)
- passage of time (nca has a fixed life of a set num of years)
- physical deterioration (wear & tear)
- depletion (worth of asset decreases)
methods of calculating depreciation?
straight line
reducing balance
revaluation
explain straight line method
advantages and disadvantages?
same amount of depreciation is charged on the cost of nca every year
advantages:
- relatively easy to calculate
- useful when nca provides equal benefit for each year of its useful life
disadvantages:
- it is necessary to estimate the useful life and the residual value of nca
- it ignores actual rate at which nca will lose value
explain reducing balance method
advantages and disadvantages?
same percentage rate is applied but it is calculated on the net book value each year
advantages:
- it matches cost with revenue
- useful for those nca where greater benefits are gained in the early years of usage
disadvantages:
- depreciation has to be recalculated every year
- depreciation charge against profit is greater than the early years of nca life
definition of:
net book value
net book value of nca is the cost price minus the total depreciation to date
explain revaluation method
advantages and disadvantages?
the opening and closing value of a nca are compared to determine the depreciation for the year
cost - value of nca at the end of financial year = depreciation for the year ended XX
advantages:
-not necessary to estimate useful life and residual value of nca
-no complex calculations required
disadvantages:
- nca has to be revalued at the end of each year
- valuation may be based on personal opinion
definition of:
residual value
the value of a nca at the end of its useful life
what is it called when nca is sold? where is it recorded?
capital receipt, recorded in disposal of nca account
what is disposal of nca account?
it is temporary and will never have balance b/d
e.g.
motor vehicle acc
disposal acc
prov. for depreciation for motor vehicle acc
motor vehicle (dr- cost; cr- disposal) disposal account (dr- motor vehicle; cr- prov. for depreciation, cash (sold for how much), income statement)
prov . for depreciation account *credit balance b/d
(dr- disposal; cr- income statement)
