Unit 4 outcome 1.2 Flashcards
Depreciation
The allocation of the cost of a non-current asset over its Useful life.
Depreciation expense
Part of the cost of a non-current asset that has been incurred in the current Period.
Useful life (Life)
Refers to the estimated period of time for which the non-current asset will be used
The purpose of depreciation
To ensure that an accurate profit is calculated by comparing revenues earned against expenses incurred in the current Period.
The straight-line method
Assumes that non-current assets contribute evenly to revenue over their life.
Historical cost (HC)
Refers to the original purchase price of the non-current asset.
Residual value (RV)
Refers to the estimated value of the non-current asset at the end of its useful life.
The cost of a non-current asset
as all costs incurred in order to bring the asset into a location and condition ready for use, which will provide a benefit for the life of the asset.
Method of depreciation are differ in
Their assumption about how asset contribute to revenue
How they allocate depreciation expense over the life of the asset
How they calculate depreciation expense
Reducing balance
Asset with moving parts such as equipment, photocopier or a vehicle is likely to be more efficient and productive when it is new and therefore contribute more to revenue at the start of its useful life than at its end.
A loss on disposal of a non-current asset
Occurs when the Carrying value of the asset is
greater than the proceeds from its sale, because it has been under-depreciated.
A profit on the disposal of a non-current asset
Occurs when the Carrying value of the asset is
less than the proceeds from its sale, because it has been over-depreciated.
Overall profit or loss on the disposal of a non-current asset is reported in the Income Statement,
as Other revenue (for a profit) or Other expense (for a loss).
