Depreciation of non-current assets

Question 1

Define depreciation.

Answer 1

Depreciation is the allocation of the cost of a non-current asset over its useful life.

Question 2

Define accumulated depreciation.

Answer 2

• Accumulated depreciation refers to the total depreciation to-date.
• It is a contra-asset and is presented as a deduction against the original cost of the non-current asset in the Balance Sheet.

Question 3

State 2 causes of depreciation.

Answer 3

1) Wear and tear
2) Obsolescence
3) Legal limits
4) Usage

Question 4

Explain why a business does not depreciate land.

Answer 4

Land has unlimited useful life and its value may increase over time.

Question 5

Explain,in relation to relevant accounting theories, why there is a need to charge depreciation for non-current assets.

Answer 5

The accounting for depreciation is in accordance with the matching concept where a portion of the cost of the non-current asset is matched against the income earned from using the non-current asset in the same period.

Question 6

State and explain the two methods of depreciation.

Answer 6

Straight-line method
Same amount of depreciation is charged every year

Reducing balance method
Amount of depreciation reduces every year

Question 7

Explain the suitability of selected depreciation method for different classes of non-current assets.

Answer 7

Straight-line method charges the same depreciation amount every year. Hence it is more suitable for non-current assets which provide the same amount of benefits every year.
Reducing balance method charges a smaller depreciation amount every year. Hence it is more suitable for non-current assets which provide lesser benefits each year. An example would be motor vehicles which, due to wear and tear, would become less efficient in the later years.