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Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 1

 COURSE SYLLABUS
• See document for details

Bekoe, Asare, Donkor and Appiagyei, Hadija 2

 UGBS 002
FINANCIAL ACCOUNTING II

SESSION 1: ACCOUNTING FOR NON-CURRENT

ASSETS

Hadija N. Nyante, PhD

hnyante@ug.edu.gh

College of Education
Dept. of Distance Education
 Overview
• Non-current assets span more than one accounting year. It is
thus important to spread the cost over the years for which an
organization benefit from the use of the asset. This session
introduces the student to the methods in accounting for the
use of tangible non-current assets.

Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 4

 Learning Objectives
• At the end of this session, you should be able to
– Determine the value of tangible non-current assets
– Identify methods of depreciating tangible non-current
assets
– Learn how to calculate depreciation using the two most
widely used methods
– Learn to make entries for depreciation in books of
accounts

Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 5

 Reading List
• Read Recommended Text –
- Chapter 12 of Marfo-Yiadom, Asante & Tackie
- Chapters 24, 26 and 27 of Wood & Sangster;
- IAS 16: Property, plant and equipment

• Other Financial Accounting text books available to students

Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 6

 NON-CURRENT ASSETS-PPE

Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

7

Bekoe, Asare, Donkor and Appiagyei, Hadija

 Accounting for Non-current Assets

• Non-current asset – This is that asset acquired to be

used in the organisation for a period more than
(normally) one year.

• Such expenditure is referred to as capital expenditure;

that type of expenditure to acquire an asset of a
permanent nature; in contrast to revenue expenditure;
the expenditure to acquire asset that is consumed
within one year, or that exists for only one year.

8
Bekoe, Asare, Donkor and Appiagyei, Hadija
 Accounting for Non-current Assets

• Capital expenditure is made for such assets once a while,

not very often; on the other hand, revenue expenditure
items are acquired very often, at least year after year; for
example annual rent, insurance or advertising expenses.

Bekoe, Asare, Donkor and Appiagyei, Hadija 9

 NCA/PPE

10

Bekoe, Asare, Donkor and Appiagyei, Hadija

 Value of non-current assets
• Initial value of any non-current asset is the cost of
the asset, which comprise of;
– the purchase price of the asset
– Carriage inwards on the asset
– any additional/related expenditure incurred to put the
asset in its usable state.

Bekoe, Asare, Donkor and Appiagyei, Hadija 11

Initial measurement/Cost Determination

Purchase All expenditures needed

price to prepare the asset for
its intended use
Acquisition
Cost

12

Bekoe, Asare, Donkor and Appiagyei, Hadija

 Initial Measurement at cost/value:
This includes directly attributable cost/value
• Cost/value = purchase price + costs to bring asset to working
condition,
• Purchase price
• Import duties
• Directly attributable costs bringing to working condition
• Site preparation
• Delivery costs
• Installation costs
• Professional fees
• Dismantling and restoring site
Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 13
 Quick practice-ALL
• A company purchased equipment on June 28 of the current year
and placed it in service on August 1. The following costs were
incurred in acquiring the equipment:

• Purchase (invoice) price GHC215,600

• Transportation GHC1,400
• Insurance during shipping GHC200
• One-year fire insurance beginning August 1 of the current year
GHC1,200
• Installation cost GHC4,500
• Raw materials and direct labour used to test the equipment
GHC1,500

• 14
Determine the amount to be recorded as cost for the equipment

Bekoe, Asare, Donkor and Appiagyei, Hadija

 CAPITAL/REVENUE EXPENDITURE
• Additional expenditures could be in the form of :

Type of Capital or
Expenditure Revenue Identifying Characteristics
1. Maintains normal operating condition.
Ordinary 2. Does not increase productivity.
Revenue
Repairs 3. Does not extend life beyond original
estimate.
Betterments 1. Major overhauls or partial
and replacements.
Extraordinary Capital
Repairs 2. Extends life beyond original estimate.

Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 15

 Practice: capital or revenue
expenditure?
• Purchase of a new van
• Petrol costs for van
• Repairs to van
• Putting extra headlight on van
• Buying machinery
• Electricity costs of using machinery
• Painting outside of new building

6/1/2024 16
 More Practice
• Carriage paid to bring machinery to warehouse
• Complete redecoration of the premises at a cost of
GHC1,500
• A quarterly account for heating
• Cost of motor tax for existing van
• Cost of motor tax for new van
• Purchase of replacement engine for existing van

6/1/2024 17
 The Concept of Depreciation

Depreciation Defined;
It is the systematic allocation of the depreciable
amount of an asset over its useful life (IAS 16).

May be explained as the measure of wearing out,

consumption or other reduction in the useful
economic life of a non-current asset whether arising
from use, efflux of time or obsolescence through
technological or market changes.
Bekoe, Asare, Donkor and Appiagyei, Hadija
18
 Causes of Depreciation

• The level of usage

• The passage of time
• Technological obsolescence
• Market Obsolescence

 Any portion of non-current assets that is determined

as having been used or consumed becomes expense.

Bekoe, Asare, Donkor and Appiagyei, Hadija 19

Factors in Computing Depreciation
The calculation of depreciation requires
three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life

20
 Methods for Charging Depreciation

 Different methods are applied based on the type of

asset and usage, or based on the different assumptions
that are made:
2 Common Methods:
 Straight line method
 Reducing balance or diminishing balance method

Other methods; Sum of years’ digits, revaluation method,

machine hour method, depletion unit method

Bekoe, Asare, Donkor and Appiagyei, Hadija 21

 Straight line method

• This method is based on the assumption that the asset

is used equally over its useful life.
• Under this method, the annual depreciation charge is
an equal sum.
It is calculated as:

Depreciations = Cost – Residual value

Estimated life

Bekoe, Asare, Donkor and Appiagyei, Hadija 22

 Straight-Line Method
cost 10,000

salvage value (1,000)

depreciable cost 9,000

useful life 5 years

cost - salvage value =10,000-1000 =1,800 per year

useful life in periods 5years

23
 Straight-Line Method

Balance Sheet Presentation

GHC
Machinery 10,000
Less: accumulated depreciation 1,800 8,200

24
 LET’S PRACTICE

Depreciat
Machine Salvage Purcha Estima
Cost ion
No. Value se Date ted Life
Method
Straight-
1 GHC82000 GHC8000 1-Jan 4 years
line
25
 Illustration 2
Cost of Motor Vehicle = GH¢500,000
Estimated life = 5yrs
Residual value = GH¢50,000
Annual Depreciation = GH¢500,000 - GH¢50,000
5
= 450,000
5
= GH¢90,000

Bekoe, Asare, Donkor and Appiagyei, Hadija 26

 Reducing balance method
• Reason
– Greater benefit is to be obtained from the early years of
using an asset
– Appropriate to use the reducing balance method which
charges more in the earlier years.
– Helps even out the total amount charged as expense for
the use of the asset each year.

Bekoe, Asare, Donkor and Appiagyei, Hadija 27

 Reducing balance method
• Annual Depreciation = Net Book Value x Depreciation Rate

• = (Cost – Accumulated Depreciation) x Depreciation Rate

Example:Cost of Motor Vehicle = GH¢500,000

Depreciation rate is 20% p.a.
Year Depreciation
Year 1 20% * 500,000 = 100,000
Year 2 20% * (500,000-100,000) = 80,000
Year 3 20% * (500,000-180,000) = 64,000

Bekoe, Asare, Donkor and Appiagyei, Hadija 28

 Depreciat
Machine Salvage Purcha Estima
Cost ion
No. Value se Date ted Life
Method
Straight-
1 GHC82000 GHC8000 1-Jan 4 years
line

Bekoe, Asare, Donkor and Appiagyei, Hadija Slide 29

 Disposals of NCA

College of Education
Dept. of Distance Education
30
 Discarding NCA
3 scenarioste of disposal.

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.

31
 Accounting Entries
Purchase of Non-current Asset by cash
DR Asset A/c
CR Cash/Bank
With the cost of the asset
When Depreciation is Charged for the year
DR Depreciation Expense A/c
CR Provision for Depreciation A/c
(Accumulated Depreciation A/c)
With the depreciation charge for the period

Bekoe, Asare, Donkor and Appiagyei, Hadija 32

 Accounting Entries
At the end of the year;
– Close off Depreciation Expense a/c to Income Statement
– Balance on provision for depreciation a/c remains as
closing balance (Bal. c/d);
to determine the net book value (NBV) at year end;
cost – provision for depreciation (accumulated
depreciation)

Bekoe, Asare, Donkor and Appiagyei, Hadija 33