Depreciation

Question 1

Define depreciation

Answer 1

Estimate of the loss of value of a non-current asset over its expected useful life
The purchase of a non-current asset is a capital expenditure

Question 2

What are the 2 accounting principles used in depreciation?

Answer 2

Matching - Cost of the asset is spread over the years which benefit from the use
Prudence - Profit and assets will not be overstated

Question 3

What are the 4 causes of depreciation?

Answer 3

Physical deterioration
Economic reasons
Passage of time
Depletion

Question 4

What are the 3 types of methods of depreciation?

Answer 4

Straight line method
Reducing balance method
Revaluation method

Question 5

What are the 3 formulas for the straight line method?

Answer 5

1. Cost of asset / number of years in use
2. Cost price - residual value / number of years in use
3. Cost price x %depreciation

Question 6

Define residual value

Answer 6

The value of the non-current asset at the end of its useful life

Question 7

What is the formula for the reducing balance method?

Answer 7

Book value i.e. Cost price - accumulated depreciation x %depreciation

Question 8

What are the 5 steps of asset disposal?

Answer 8

Step 1: Take out the cost price of the asset you are selling
Debit: Asset disposal
Credit: Asset (Vehicles)

Step 2: Take out the accumulated depreciation on the asset you are selling
Debit: Provision for depreciation
Credit: Asset disposal

Step 3: How do you sell the asset?
Debit: Bank/Creditor/Debtor
Credit: Asset disposal

Step 4: Calculate if you made a profit/loss on sale of asset
If you add to the debit side = Profit
If you add to the credit side = Loss

Step 5: Calculate the depreciation on the remaining assets