Chapter 7 - Non current assets and depreciation Flashcards
What is the cost of a non-current asset?
Any amount incurred to acquire the asset and bring it to working condition
What costs are involved in capital expenditure?
- Purchase Price
- Delivery costs
- Legal fees
- Further expenditure to enhance the asset
What costs are involved in revenue expenditure?
- Repairs
- Renewals
- Repainting
What is the double entry to record a non-current asset?
Dr NCA
Dr VAT
Cr Cash/ T.P
What is depreciation?
- The systematic allocation of the depreciable amount of an asset over its useful life.
- The cost of an asset MINUS its residual value = Depreciation over time
Why does an asset depreciate?
The asset will be used to generate revenues over its life so some cost needs to be matched against these revenues.
When might depreciation arise?
- Use of an asset
- Physical wear and tear
- Passing of time, e.g. lease
- Technological advances rendering asset obsolete
- Depletion
What is the double entry for the depreciation of a non-current asset?
Dr Depreciation expense
Cr NCA
What type of asset doesn’t depreciate?
Land - usually has an infinite life
When does an asset BEGIN to depreciate?
When the asset becomes available to use.
What is residual value?
The amount that a business would currently get from disposing of the asset at the end of its useful life.
What is useful life?
The period for which an asset is available for use.
What is the carrying amount?
Original cost MINUS accumulated depreciation on the asset to date
What is the straight line method?
Depreciation charge = [Cost - Residual Value]/ Useful life
Or
X% * Cost (when there is no residual value)
What is the reducing balance method?
Depreciation charge = X% * Carrying amount
