Lecture Four Flashcards
What are non current assets
assets that are:
-long life
-used in business
-not bought for the purpose of reselling
-of material -e.g. significant value (materiality concept)
What does the materiality concept refer to
materials that arent worth disclosing. e.g. a stapler, it is used for daily use and is an asset of business but it doesnt have a value that is needed to be kept track of.
What are the two main categories of non current assets
Tangible and Intangible
What does NCA stand for
Non current assets
What does tangible mean & examples
NCAs that u can see and touch
e.g. land, buildings, machinery, equipment, computer, vehicles
What does Intangible mean & give examples
Assets that dont have a physical presence
e.g. brand names, patents, goodwill
What is the name refering to spending on non current assets
Capital expenditure
When is capital expenditure incurred
Buying non current assets OR Adding to the earning CAPACITY of EXISTING non current assets -improving them
What is included in the costs of buying an NCA
1- delivery cost
2- legal costs of buying land/buildings
3- any initial costs needed to get the NCA ready before the first use - of which will benefit the business long term
What is an example of the delivery cost
e.g. buying from india may be cheaper but that would mean increased delivery cost = increased capital cost
What is an example of the legal costs of buildings or land
E.g. installing it/building it/designing it with architect cost
What is revenue expenditure
spending money incurred ON RUNNING COSTS of the business and maintaining its NCA -
is repairing capital or revenue expenditure
revenue expenditure because repairing which is correcting not improving
Depreciation meaning
When non current assets wear out or become obsolete (out of date) - when they dont last forever - therefore the cost of the NCA but be SPREAD OVER its useful life
Can freehold land be depreciated ?
No, freehold land generally has an unlimited useful life
What are the two ways to spread cost when deprecating
-straight line depreciation
-reducing balance depreciation
How to do straight line depreciation
equal benefit for each year of using the nca
How to work out the straight line depreciation
Original Cost - estimated residual value / expected years of use
Residual value meaning
The value of the asset at the END of its useful life
What is meant by the carrying down amount
The amount that is left after it has been depreciated for that year
What is also meant by carrying down amount
Net book value (NBV)
What is meant by the deprecation expense
the amount that is reducing the cost over the years
Why is the straight line depreciation bad
- Expect = abit absurd, no idea how long itll last, e.g. breaking down..
- -have to guess = making the figures meaningless
- -calculation based on artifice and guessed cost of life of an asset
What if theres no residual value estimated
Usually there isnt a residual value
-instead they express the straight line depreciation as a % of the cost of the asset
e.g. a computer bought at 1200 is expected to last 4 years
= 1200 x 25% = £300 depreciation per year
what is reducing balance depreciation?
- a fixed percentage is applied to the cost of the NCA in the first year is is bought
-in the following years the same percentage is applied to the reduced balance (i.e. the cost - all depreciation charged to date (NBV))
example of reducing balance depreciation: bought machine for £10000 on 2011 and charge 20% reducing balance
depreciation expense for Y1 = (2000)
Reduced Balance y1 = 8000
depreciation expense for 2 = (1600)
Reduced Balance y2 = 6400
etc.
Which financial account does deprecation expense display on
SPL - statement of profit and loss
What is meant by the accumulated depreciation
reflecting the amount of the original cost that has been used up
Which financial account does accumulated expense display on
SFP - statement of financial position
Is accumulated expense credit or debit
Credit
Is accumulated expense credit or debit
What are the two ways of computing the depreciation if the NCAs weren’t purchased at the first day of the accounting year?
- charge monthly depreciation BASED ON NUMBER OF MONTHS THE ASSET HAS BEEN OWNED (Pro rata)
-Simply charge the full year of depreciation in the year of acquisition but none in year of the disposal
Example of using the method of depreciation where its not at the start of the accounting period:
Machine A for £24000 on 01/11/24
Machine B for £19200 on 1/02/25
25% straight line method
-use the method where u record full year of acquisition and none of year of disposal
both machines bought in the financial year ending 31/05/25 - full year of depreciation charged
=(24000 + 19200) x 25% = £10800
Example of using the method of depreciation where its not at the start of the accounting period:
Machine A for £24000 on 01/11/24
Machine B for £19200 on 1/02/25
25% straight line method
-use the method where u calculate depreciation on monthly basis
Machine A dep = 24000 x 25% = £6000 per year
-owned for 7month
6000 x 7/12 = £3500
Machine B dep = 19200 x 25% = £4800 per year
-owned for 4 month
4800 x 4/12 = £1600
=£5100
What is meant by the Disposal of NCA
When business sells the NCA - almost certainly receive either more/less then the asset net book value on the date of disposal
-therefore profit/loss wil arise
How to work out the disposal of NCA
Sale proceeds (what its sold at) - NBV at the date of disposal
=P or L on disposal
Where would the disposal profit or loss be displayed
On the SPL as ‘other name’ or ‘negative expense’ among the expenses
What is another word for Part-exchange
Trade in
What is meant by the part exchange?
when the NCA is disposed of by giving it in a trade in for the new one
How is the disposal proceeds displayed with the part exchange
old asset part exchange = trade in value
What would the disposal proceeds be if:
a new van is £16000
paid £12000 cash + traded in an old van
effective disposal proceeds = £4000 for the OLD van
name the 10 accounting concepts relating to NCA
- business entity
- money measurement
- materiality
- historical cost
- substance over form
- time interval
- dual aspect
- accrual basis
- going concern
- consistency
What type of expenditure if referred to when talking about the COST of the NCA
Only the capital expenditure - revenue expenditure IS NOT PART OF THE ASSET COST
