ACCOUNTING FOR NON-CURRENT ASSETS

Non-current assets are purchased by a business in order to generate profits and are used for more than
one financial year e.g motor vehicle

A non-current asset (except land) has a limited useful life and hence should be depreciated.

The cost of a non-current asset includes:

a) The initial purchase price e) installation and assembly costs

b) Any import duties f) cost of testing the asset
c) Cost of site preparation g) professional fees or legal fees
d) Initial delivery and handling costs h) signwriting on a vehicle

Capital expenditure

It is expenditure which results in the acquisition of non-current assets or an improvement in their

earning capacity. Capital expenditure is not charged as an expense in the Income Statement.

It is money spent that has a long-term benefit to the business.

Revenue expenditure

Expenditure incurred in running a business on a day-to-day basis. It is also expenditure incurred to

maintain the earning capacity of non-current assets. E.g electricity , rates

It is money spent that has a short term benefit (less than one year) to the business.

Capital receipts

It is any money received that is not from normal trading e.g sale of noncurrent asset proceeds. They do
not appear on the income statement but are accounted for on the SFP.

Revenue receipts

They arise from the normal business activities. They are also incidental to the main business activity.
Revenue receipts are credited to the income statement e.g rent received, interest received

Recording the purchase of non-current asset

The purchase of a non-current asset that is paid immediately will be recorded in the cash book. The
purchase of a non-current asset on credit will be recorded in the general journal.

Non-Current Assets account

Balance b/d XXX Disposal XXX

Cash/bank XXX
Trade XXX Balance c/d XXX
exchange/Addition
XXX XXX
Balance b/d XXX

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Depreciation

It is that part of the original cost of a non-current asset that is consumed during its period of use by the
business. Depreciation is a means of spreading the cost of a non-current asset over its useful life. It is the
loss in value of a non-current asset and is charged to the income statement.

It is a non-cash expense because it allocates costs to later years for a cash payment that has occurred
previously. It does not provide fund for the replacement of an asset when it is no longer in use.

Reasons why assets depreciate

 Wear and tear. Assets become worn out through use.

 Obsolescence. An asset becomes out of date through technological advances or a change in
tastes and fashion.
 Passage of time. Passage of time reduces the value of an asset even if it is not used.
 Exhaustion or using up. Mines, quarries, oil wells as the minerals are extracted from them.

Methods of depreciation

a) Straight line method

A fixed amount is charged per annum to the Income Statement over the life of the asset.
It is calculated as a fixed percentage on cost. The total depreciation is spread evenly over the
number of years of its expected life.
Annual depreciation charge = cost –residual value
Estimated useful life (years)
It is useful for assets which provide equal benefits each year e.g machinery , furniture
Example
1. Bought machinery $200,000 on 1 January 2000. It has an estimated useful life of $50,000
and an estimated useful life of 5 years.
Annual depreciation= 200,000-50,000 =150,000 = 30,000 per year
5 5
2. Bought motor vehicle $20,000 on 1 January 2000.Depreciation is 20% per annum using
straight line method.
Year 2000 Cost 20,000
Less depreciation (20% X20,000) (4000)
Net book value 16,000
Year 2001 less depreciation (20% X20,000) (4000)
Net book value 12,000
Year 2002 less depreciation (20% X20,000) (4000)
Net book value 8,000
b) Reducing balance / Diminishing balance method
Depreciation is calculated as a fixed percentage of the written down value of the asset each
year. The annual charge for depreciation is higher in the earlier years of the asset’s life and
lower in the later years.
A decreasing amount of depreciation is charged each year to the income statement and so
assumes that more benefit is consumed in earlier years.it is useful for assets which provide
more benefit in earlier years e.g motor vehicles , computers.

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 Example
3. Bought motor vehicle $20,000 on 1 January 2000.Depreciation is 20% per annum using
reducing balance method.
Year 2000 Cost 20,000
Less depreciation (20% X20,000) (4000)
Net book value 16,000
Year 2001 less depreciation (20% X16,000) (3200)
Net book value 12,800
Year 2002 less depreciation (20% X12,800) (2560)
Net book value 10,240
c) Revaluation method
Used where the assets are made up of small items e.g loose tools. Loose tools are small items of
non-current assets which may individually be of limited value but taken together their value may
become significant.
Calculation of depreciation
Opening valuation xxx
Add purchases during the year xxx
Xxx
Less closing valuation ( xxx)
Depreciation for the year xxx

Disposal of non-current assets

The accounting entries are:
(i) Transfer the cost price of the asset sold to an asset disposal account
Debit asset disposal account e.g Van disposal account
Credit Asset Account e.g van account
(ii) Transfer the depreciation already charged to the asset disposal account
Debit Provision for Depreciation:Asset account
Credit Asset disposal Account

( iii) The amount received on disposal

Debit Cash book

Credit Asset disposal account

(iv) Transfer the difference to the Income statement

a) If the disposal account shows a difference on the debit side ,there is a profit on sale
Debit asset disposal account
Credit Income statement
b) If the asset disposal account shows a difference on the credit side ,there is a loss on
sale Debit Income Statement
Credit asset disposal account

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 Asset disposal account

Asset XXX Depreciation XXX

Cash/bank XXX
Income statement XXX
XXX XXXX

Provision for depreciation : Asset Account

Disposal XXX Balance b/d XXX

Balance c/d XXX Income Statement XXX
XXX XXX

Part exchange

A business may purchase a non-current asset and part exchange another non-current asset that it
wishes to dispose of , as part of the purchase price. The part exchange value of the asset being disposed
of is debited to the non-current asset account and credited to the disposal account as the proceeds of
disposal.

Example

At 1 January 2017 , James owned an old vehicle costing $60,000 . The vehicle had been depreciated by
$24,000. On the same date he purchased a new motor vehicle for $120,000. He paid $82,000 by cheque
for the vehicle and part exchanged his old vehicle for the balance. It is the business policy to depreciate
all vehicles at 10% per annum on cost.

Required

a)Motor Vehicle Account

b) Provision for depreciation: motor vehicles Account

c) Motor Vehicle Disposal Account

Motor Vehicles Account

Balance b/d 60,000 Disposal 60,000

Bank 82,000
Disposal(part 38,000 Balance c/d 120,000
exchange)
180,000 180,000
Balance b/d 120,000
Provision for depreciation: Motor Vehicles Account

Disposal 24,000 Balance b/d 24,000

Balance c/d 12,000 Income statement 12,000
36,000 36,000

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 Motor vehicle Disposal Account

Motor vehicle 60,000 Accumulated 24,000

depreciation
Income 2,000 Motor vehicle(part 38,000
statement(profit on exchange)
disposal)
62,000 62,000

Choice of depreciation method

Straight line method

Should be used for assets that are expected to earn revenue evenly over their useful working lives. It is
also generally used where the pattern of an asset’s earning power is uncertain.

It should always be used to amortise the cost of assets with fixed lives eg leases

Reducing balance method

Should be used when it is considered that an asset’s earning power will diminish as the asset gets older.
It is also used when the asset loses more of its value in the early years of its life e.g motor car

Provisions for depreciation and the accounting concepts

Matching concept

The cost of using non-current assets to earn revenue should be matched in the Income Statement to the
revenue earned.

Prudence

If the cost of using non-current assets was not included in the income statement profit would be
overstated.

Journal entry for depreciation

Depreciation (income statement) XXX

Provision for depreciation: Asset XXX

Depreciation is not recorded in the asset account but in a separate Provision for Depreciation Account.

Balance Sheet extract

COST DEPRECIATION NET BOOK VALUE

NON-CURRENT ASSET
Motor vehicles XXX XXX XXX

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Non-current asset schedule

Buildings Motor vehicles Total

COST
Opening balance XXX XXX XXX
Additions XXX XXX XXX
Disposal XXX XXX XXX
Closing balance XXX XXX XXX

DEPRECIATION
Opening Balance XXX XXX XXX
Charge for the year XXX XXX XXX
Disposals XXX XXX XXX
Closing balance XXX XXX XXX

NBV at opening XXX XXX XXX

NBV at closing XXX XXX XXX

ZIMSEC J2009 P2 Q3

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 c) Explain whether Intercity Limited can change its depreciation method from straight
line to reducing balance method(2)

Zimsec November 2010 P2

1 (a) (i) Motor vehicle Account (5) (ii) Provision for depreciation of motor van (11)
(iii) The Disposal Account (4)

b) The accountant of Tashinga Limited feels that the reducing balance is a better method of
depreciating motor vehicles.(i) State 2 advantages of the reducing balance method (2)

(ii) Explain whether it is permissible for Tashinga Limited to change from straight line method to
reducing balance method.

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