chapter 4 - depreciation of non current asset

Question 1

what are non current assets

Answer 1

assets which intend for continuous use within a business

Question 2

what is the double entry for recording a non current asset

Answer 2

debit non current asset
credit cash/payable

Question 3

what financial statement does posting a non current asset affect

Answer 3

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.

Question 4

what is depreciation

Answer 4

depreciation is the mechanism we use to charge the cost to the statement of profit or loss over an appropriate period of time

Question 5

what is the accounting rule which tells us how to deal with non current assets and depreciation

Answer 5

International accounting standard 16 (ISA 16)

Question 6

what is depreciable amount

Answer 6

The cost of of the asset minus any residual value

Question 7

what is residual value

Answer 7

is the scrap or sale proceeds you will get for the asset at the end of its life

Question 8

what is estimated useful life

Answer 8

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)

Question 9

why is the full expense of the non current asset not included as an asset in the statement of profit or loss

Answer 9

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.

Question 10

what is the only current asset which isnt depreciated

Answer 10

land as it has an indefinite useful life

Question 11

what are the two methods of depreciation

Answer 11

straight line depreciation and reducing balance depreciation

Question 12

what is straight line depreciation used for

Answer 12

if we know how long they will last for

Question 13

what is reducing balance depreciation used for

Answer 13

cars and vans

Question 14

what does straight line depreciation do

Answer 14

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.

Question 15

what is the formula for calculating straight line depreciation

Answer 15

cost - residual life / useful economic life = annual depreciation charge

Question 16

what is the carrying amount

Answer 16

This is the cost less the accumulated depreciation also known as net book value or NBV

Question 17

what is accumulated depreciation

Answer 17

all of the depreciation charged to date on an asset

Question 18

what is reducing balance depreciation

Answer 18

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.

Question 19

formula for reducing balance depreciation

Answer 19

carrying amount x depreciation rate = annual depreciation charge

Question 20

what is the journal for depreciation

Answer 20

debit depreciation expense (statement of profit or loss)
credit accumulated depreciation (statement of financial position) - as it makes the asset lower

Question 21

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

Answer 21

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