chapter 4 - depreciation of non current asset Flashcards
what are non current assets
assets which intend for continuous use within a business
what is the double entry for recording a non current asset
debit non current asset
credit cash/payable
what financial statement does posting a non current asset affect
The statement of financial position. so at posting a non current asset no expense has been charged to the statement of profit or loss even though the asset will be used either directly or indirectly to generate profits.
what is depreciation
depreciation is the mechanism we use to charge the cost to the statement of profit or loss over an appropriate period of time
what is the accounting rule which tells us how to deal with non current assets and depreciation
International accounting standard 16 (ISA 16)
what is depreciable amount
The cost of of the asset minus any residual value
what is residual value
is the scrap or sale proceeds you will get for the asset at the end of its life
what is estimated useful life
the period of time the asset will be used in the business (this is the same as an assets physical life which may be a lot longer)
why is the full expense of the non current asset not included as an asset in the statement of profit or loss
non current assets have a useful life of more than a year therefore we need to spread the cost of the asset over its useful life to the business. the accruals concept says that transactions should be reflected in the accounting period they relate.
what is the only current asset which isnt depreciated
land as it has an indefinite useful life
what are the two methods of depreciation
straight line depreciation and reducing balance depreciation
what is straight line depreciation used for
if we know how long they will last for
what is reducing balance depreciation used for
cars and vans
what does straight line depreciation do
this method makes the depreciation charge the same in every year. it is suitable for assets that dont change or perform any differently over the period the business owns them.
what is the formula for calculating straight line depreciation
cost - residual life / useful economic life = annual depreciation charge
what is the carrying amount
This is the cost less the accumulated depreciation also known as net book value or NBV
what is accumulated depreciation
all of the depreciation charged to date on an asset
what is reducing balance depreciation
the depreciation charge is higher at the start of an assets life and as the asset gets older the annual depreciation charge will be reduced. this is suitable for assets where the business gets more benefit from the asset in early years.
formula for reducing balance depreciation
carrying amount x depreciation rate = annual depreciation charge
what is the journal for depreciation
debit depreciation expense (statement of profit or loss)
credit accumulated depreciation (statement of financial position) - as it makes the asset lower
how do balancing off t accounts for depreciation of non current assets differ for the statement of profit or loss and the statement of financial position
statement of profit or loss items - these accounts record the income or expense for one year only and at the end of the year they are ‘cleared out’ to nil. we then start from scratch the following year as we may not generate the same sales in the following year
statement of financial position - as these accounts record assets and liabilities they are different. if you own a car at the start of one year you are likely to still own it at the start of next year. therefore these are carried down rather than cleared off
