non-current assets Flashcards
define capital expenditure
consists of the cost to buy and bring the NCA to its intended use. provides benefits that last for more than one year.
define revenue expenditure
consists of the cost to operate, repair and maintain the NCA in working condition. provides benefits that are the used up within one year.
distinguish between capital and revenue expenditure
capital expenditure: provides benefits that last for more than one year
revenue expenditure: provide benefits which will be used up within one year
capital expenditure: recorded as a NCA in the statement of financial position
revenue expenditure: recorded as an expense in the statement of financial performance
capital expenditure: cost to buy and bring the NCA to a ready-to-use condition
revenue expenditure: cost to operate, repair and maintain the NCA in working condition
examples of capital expenditure
cost price of a new machine, delivery cost of the new minute, installation cost
examples of revenue expenditure
petrol, repair expense, maintenance expense
the application of the materiality theory on the treatment of capital and revenue expenditure
if the amount spent on a NCA is insignificant to decision-making when compared to the size of the income, profit, assets or equity of the business, it can be recorded as a revenue expenditure (expense). This is in accordance to the materiality theory.
capital expenditure wrongly recorded as revenue expenditure
effect on other expenses: overstated
effect on profit: understated
effect on NCA: understated
revenue expenditure wrongly recorded as capital expenditure
effect on other expenses: understated
effect on profit: overstated
effect on NCA: overstated
define depreciation
the allocation of the cost of a NCA over its estimated useful life. it is recorded as an expense in the statement of a financial performance.
define accumulated depreciation
total depreciation to date of a non-current asset. it is a contra-asset and is presented as a deduction against the NCA in the statement of financial position.
causes of depreciation
usage, wear and tear, obsolescence, legal limits
in relation the relevant accounting theories, why is there a need to charge depreciation
- when a business uses a NCA to generate income, a portion of the cost of the NCA has to be recorded as depreciation expense and matched against the income earned in the same financial period to arrive at the profit for the period. this in accordance to matching theory.
- NCA should be valued at their net book value, which is cost less accumulated depreciation. this is in accordance with the prudence theory which states that the accounting treatment chosen should be the one that least overstates assets and profits.
state the valuation method for NCA in the statement of financial position
NCA valued at cost less accumulated depreciation in the statement of financial position
straight-line method
assumes that the NCA provides the same benefits throughout its estimated useful life
an equal amt of depreciation is recorded every year
straight-line method formula
1) rate of depreciation x (cost-scrap)
2) (cost-scrap value)/useful life
reducing-balance method
assumes that the NCA provides more benefits in the earlier years than in its later years
depreciation amount reduces every year.
reducing-balance method formula
rate of depreciation x net book value (cost price-accumulated depn)
straight line method useful when
business uses NCA uniformly throughout its estimated useful life
reducing balance method useful when
business uses NCA more in earlier years and less as NCA gets older and becomes less efficient
consistency theory application in depn
states that a business should use the same method of depn and rate of depn for every financial period to enable meaningful comparison of the net book value of the NCA over time
journal entries for credit purchase of NCA
dr NCA
cr trade payables-name
journal entries for depreciation
dr depreciation expense
cr accumulated depn
presentation in financial statements for depn
name of business
statement of financial performance for the year ended —-
less: other expenses $
depreciation of — (x)
name of business
statement of financial position for the year ended —–
nca cost accumulated depn net book value
—- A B A-B
journal entries for recording sale of NCA, including closing entry
dr sale of NCA
cr NCA
dr accumulated depn
cr sale of NCA
dr cab/cash in hand/other receivable
cr sale of NCA
if gain,
dr sale of NCA
cr income summary
if loss,
dr income summary
cr sale of NCA
