Task 7 Theory Depreciation Flashcards
Reasons for assets to diminish
Wear and tear
technical obsolence
commercial obsolence
What is commercial obsolence
when equipment has no further use due to a decline in the market demand for the goods or services it helps to produce.
what is technical obsolescence
occurs when the asset becomes out of date and inefficient due to new technologies.
Factors determining depreciation charge under cost allocation process
Cost price of asset
useful life
residual value
What are 2 methods to calc depreciation
straight line method
diminishing balnce method
What is straight line method
involves a constant charge of depreciation in every reporting period.
when is straight line method used
used when the asset is expected to contribute evenly to the income-earning activities of the business over its useful life
what is diminshing balance method
involves a decreasing charge of depreciation being made to the asset in every reporting period. It is used when more income is expected in the early years of an asset’s useful life.
egs of straight line method
furniture, fittings, buldings
eg of diminishing balance method
equipment and machinery
Cost of a Non-Current Asset
purchase price of the asset
cost of preparing the asset for use such as installation cost
additions to the asset(like aircon)
straight line formula
Original cost – Estimated residual value/Estimated useful life
Advantages of straight line
simple to use
more appropriate where the benefits from the asset are roughly equal in each period
disAdvantages of straight line
not take into account the degree of usage, age or efficiency of the asset
doesnt account fro wear and tear in its later life
Reducing balance method formula
(Original Cost – Accumulated Depreciation) x % Rate
advantages of diminishing balance method
suitable when asset is greatest in the early years of its useful life
depreciation charge is lower as the asset becomes older and when there is a likelihood of higher maintenance costs
disadvantage eod diminishing method
- the depreciation charge in the final year may need to be adjusted
firs t 3 steps for disposal of depreciable asset
1) Depreciate the non-current asset for that part of the current accounting period 2)Transfer the original cost of the asset being sold from the Non-Current Asset account to the Sale of Asset account.
3)Transfer the depreciation that has been accumulated on the asset sold from the Accumulated Depreciation account to the Sale of Asset account
last 3 steps of disposal of depreciable asset
- Record the proceeds from the sale of the non-current asset in the Sale of Asset account.
- determine if its a gain or loss
- on balacne day trnasfer amount from depreciation to profit loss account
