Chapter 6: Non-Current Asset Depreciation

 Depreciation:
o The decrease in value of a non-current asset over time which represents the cost of
using the asset
o The amount is recorded as an expense in the SoPL
o Accrual Concept: The cost of using the non-current asset is matched with the
revenues the asset helped generate in a given accounting period
o It is a non-cash transaction

 Causes of Depreciation
o Wear and Tear
o Obsolescence
o Reduction of natural resources (mines)
o Passage of time (leases)

 Methods of Depreciation
o Straight-Line Method
 The same amount of depreciation is charged every year
Cost −Residual Value
 Depreciation per year = Useful Economic Life
¿
¿
 Depreciation per year = Depreciation % ×(Cost−Residual Value )

o Reducing Balance Method

 A fixed percentage of the carrying value is depreciated each year
 Carrying Value = Cost – Accumulated Depreciation
 Depreciation expense in a given year
= Depreciation % ×Carrying Value of Asset

o Revaluation Method
 Mainly used for a collection of important items that are individually not
worth a lot. Items such as printers, stationery, telephone etc.
 The assets are simply revalued each year
 The change (usually decrease) in value represents depreciation

o Effect on Profit
 SL method: profit is reduced by the same amount every period
 RB method: depreciation is higher in the early years and hence profit will be
lower.
 Taking higher maintenance costs of later years into account, RB may
be an accurate representation of the actual costs of using the asset.

o Changing methods of depreciation

 Must be done with good reason
 The new method should be a more accurate representation of asset usage
than the previous method
  Otherwise a change will violate the accounting concept of consistency and
may be an attempt to overstate or understate profits and asset value.
 What if asset was purchased or sold during the year?
o Depreciate on a monthly basis (Pro rata)
o Full year of depreciation is charged in year of purchase and none in year of disposal
o Full year of depreciation is charged in year of disposal and none in year of purchase

 Double Entry for Depreciation

o Depreciation is adjusted for at the end of the financial year
o Asset account is recorded at cost and is not adjusted at all
o Double Entry:
 Debit Depreciation Expense: asset name (Expense account whose balance is
then transferred to statement of profit and loss)
 Credit Provision for Depreciation: asset name (negative asset account that
records the accumulated depreciation of an asset and is shown on the
statement of financial position)

 Disposal of Non-Current Assets

o Sell a non-current asset at the end of its useful life or prior to
o If the amount received is greater/less than its carrying value then there will be a
profit/loss on disposal
o Profit on disposal is recorded as other operating income
o Loss on disposal is reported as an expense
o Double Entry:
 Remove the non-current asset (cost):
 Debit Disposal account; Credit Non-current asset account
 Remove accumulated depreciation on the disposed asset:
 Debit Provision for depreciation: asset account; Credit Disposal
account
 Record proceeds from disposal:
 Debit Cash/Bank; Credit Disposal account
 If the balance on disposal account is a credit/debit then there is an
expense/gain transferred to the SoPL at the end of the period

 Part Exchange of an Asset

o Sometimes non-current assets are sold to acquire a new one (part exchange)
o Normally the company will need to pay an extra amount in addition to disposing the
old asset to acquire the new asset.
o The part exchange value of the old asset is the difference between the amount paid
and the cost of the new asset
o A profit or loss on disposal is the difference between the part exchange value and
the carrying value
o Double entry:
 Remove old asset: same as disposal
 Remove accumulated depreciation: same as disposal
 Acquire new asset:
 debit non-current asset account twice;
  credit cash/bank and credit disposal account (part exchange value)

 Schedule of Non-Current Assets:

o Summary of the movement of non-current assets over the year
o Shows additions, disposals, revaluation, and depreciation charges to each type of
non-current asset