S1L10 Depreciation And Non-current Assets Flashcards
What is depreciation?
Depreciation is to match the cost of a non-current asset over its useful economic life.
What is the accruals/matching concept?
The accruals/matching concept matches sales income with the expenditure that has generated that income.
How is depreciation related to sales income?
A proportion of the cost of a non-current asset should be offset against the sales income it has generated.
What is the definition of depreciation?
Depreciation is the systematic allocation of a non-current asset over its useful economic life.
Why do we need depreciation?
To spread the cost of a non-current asset gradually over the years of its use and wearing out.
What are the two common methods of calculating depreciation?
The two common methods are the Straight Line Method and the Reducing Balance Method.
What is the Straight Line Method?
Charge an equal amount of depreciation each year.
Annual depreciation = (cost - residual value) / estimated useful life.
What is the Net Book Value (NBV) of a non-current asset?
The NBV is its historic cost minus all depreciation charged to date (accumulated depreciation) on that asset.
What is historic cost?
Historic cost is the original purchase price of the asset.
What is accumulated depreciation?
Accumulated depreciation is the total depreciation charged/taken to the Income Statement since the purchase of the asset.
What is the Reducing Balance Method?
Charge more depreciation in the earlier years of use, less in the later years.
Apply a constant % of the Net Book Value every year.
