Depreciation Flashcards
What will the COST of a non-current asset contribute to?
The ability of an entity to earn revenue for a number of accounting periods.
Why would it be unfair if the total cost of the asset was treated as an expense in the SOPL in the year of acquisition?
If the asset has a finite life, the cost is spread over all the accounting periods in which the asset is expected to make a CONTRIBUTION to earnings.
What is known as the ASSETS USEFUL LIFE?
The cost of the asset spread over its life expectancy.
What is it called when you spread the cost of the asset over its useful life?
Depreciation.
What does IAS 16 Property, Plant & Equip define DEPRECIATION?
The measure of the cost or revalued amount of the economic benefits of the tangible non-current asset that has been consumed during the period.
What does depreciation match?
Matches the COST of using a non-current asset to the REVENUES generated by that asset over its useful life.
Why must depreciation be periodically reviewed?
To ensure the pattern of use of the asset is still appropriate.
Why do we record a DEPRECIATION CHARGE EACH YEAR? The effect of which is 2 fold.
- REDUCE the SOFP of the non-current asset by “accumulated depreciation;
- RECORD the “annual depreciation charge” as an expense in the SOPL - to match to the revenue generated by the non-current asset in that ac period.
What is the double entry when an asset is purchased?
DEBIT - Non-Current Assets or P&M
CREDIT - Payables
If a set of financial acs were prepared immediately after an asset was purchased we would?
DISPLAY - the balance on the Asset Ac (cost of the asset) on the SOFP
WOULD NOT APPEAR - as an expense in the SOPL yet BECAUSE we have not yet begun to “consume” it in the earning revenue.
During the accounting periods of the assets “useful life”
WE MUST ALLOCATE ITS ORIGINAL COST ON SOME REASONABLE BASIS - An appropriate proportion of the cost must be recorded as an EXPENSE called the Depreciation Charge in the SOPL
Each year we calculate some proportion of the original cost now been “consumed” or used up in the operating business.
This proportion is transferred to the SOPL as an expense and the amount remaining on the SOFP is correspondingly reduced. This remaining balance is called the CARRYING AMOUNT.
