Depreciation, NCAs and accruals Flashcards
What is capital expenditure?
Spending on long-term assets that will provide benefits over several years
Examples include the purchase of land, machinery, and buildings
How does capital expenditure affect the balance sheet?
Shows on the balance sheet as an asset and depreciates over time
What is revenue expenditure?
Spending on the day-to-day operations of the business
examples: rent, petrol, repairs, salaries
Examples include rent, petrol, maintenance, repairs, salaries, utilities
How is revenue expenditure recorded?
Recorded directly as an expense on the income statement
What does depreciation refer to?
Decrease in value of the price of an asset (Non-Current Asset)
What is the accounting definition of depreciation?
The allocation of an asset’s cost to expense over time
What are the factors used in calculating depreciation?
- Historical cost
- Service life
- Residual value
- Depreciation method
What is service life in the context of depreciation?
The estimated use the company expects to receive from the asset before disposing of it, or a depreciation rate (%)
What is residual value?
The amount the company expects to receive from selling the asset at the end of its service life
What is depreciable cost?
The original cost minus the residual value
What does depreciation expense represent?
The cost for the current period, increasing expenses
What does accumulated depreciation represent?
The total depreciation accumulated over the asset’s life, reducing the asset’s value on the balance sheet
How is net book value calculated?
Cost minus depreciation
Explain straight-line depreciation
Spreading the cost EVENLY over an assets life
Explain reducing balance depreciation
Charges a percentage of the asset’s book value each year
What is the most common method to dispose of a long-term asset?
Sale
What occurs when a long-term asset is no longer useful but cannot be sold?
Retirement
In the income statement, where would the profit from car sales be recorded?
Other income
In the income statement, where would the loss from car sales be recorded?
Expenses
What happens to the assets in the statement of financial position upon disposal of non-current assets?
Remove the cost of the asset and remove the accumulated depreciation
What is the formula to calculate the gain or loss on the sale of an asset?
Sales proceed - NBV
What are accrued expenses?
Costs used in the current period that the company hasn’t yet paid cash for
How to record an accrued expense
*Debit expense
Credit Accrued expenses (liabilities)
when you actually pay
* Debit Credit accrued expense (liabilities)
Credit bank
How do accruals impact the income statement?
Add to the expenses
