Depreciation And Disposal Of Non-current Assets Flashcards
What is the need for depreciation?
Application of the prudence principle: depreciation is needed to record part of the value lost on a non-current asset in a specific financial period to ensure that profit is not overstated
Application of the matching principle: depreciation is needed to ensure that the value lost on non-current assets due to its usage over a specific financial period is matched with the income generated for the same period
What is the need for provision for depreciation?
Application of the prudence principle: the total value lost on a non-current asset since its purchase date is subtracted from its cost price to ensure its value is not overvalued at the end of each financial period
Define depreciation
The estimated loss of value of non-current assets over a financial period
Define provision for depreciation
Accumulated amount of depreciation written off on a non-current asset up to a certain date
Define book value
Cost price of non-current assets less provision for depreciation
What are the causes of depreciation?
Physical deterioration: wear & tear - assets wearing out through use/ falling in a bad physical state
Economic reasons: obsolescence - assets becoming out of date/ assets no longer have capacity to meet needs of business
Passage of time
Depletion
What are the reasons for depreciation?
Matching principle: when business calculates profit & loss, income earned through the use for non-current assets during the financial year must be matched against the expenses incurred from using that asset during the same financial period
Prudence principle: for ensuring that profits are not overstated and non-current assets should not be overvalued. The value of the non-current assets decreases from year to year over the useful life of these assets so the value in the books must be the same
Define capital receipts
Money received from the sale of non-current assets
Eg sale of a vehicle
Define revenue receipts
Money received from the sale of goods and other income
Eg cash sales, rent income, interest received
Define capital expenditure
When business spends money to buy or add value to non-current assets
Eg buying vehicle, equipment, land and building; extension/ improvement done to an existing non-current asset
Define revenue expenditure
When money is spent on the expenses needed for a day-to-day running of the business
Eg wages, repainting building, telephone
What is the effect of depreciation on non-current assets?
Prudence principle: reduces the value of non-current assets during their economic life span, so that assets are not overvalued
Matching principle: it matches the losses in value of non-current assets to the benefits gained by these assets in a particular year
What are the factors to consider before choosing the depreciation method?
How long will the asset last
Residual value/ how much an asset will be sold for when put out of use
Type of non-current asset
How can “use” be measured
The total cost of the non-current asset
What are the differences between straight line and reducing balance?
Explain when and why straight line will be used to calculate depreciation
Explain when and why revaluation will be used to calculate depreciation
Explain when and why reducing balance will be used to calculate depreciation
How does the income statement of a sole trader look?
How does a statement of financial position for a sole trader look?
How does a disposal account look?
