Non-current assets
Capital expenditure is items bought for long-term use or non-current assets. Revenue
expenditure is short-term items which are bought and are charged to the statement of profit
or loss.
Non-current assets are either tangible or intangible. Tangible means that they can be
touched. (Intangible is not touched on this topic.)
The cost of non-current assets includes the amount to acquire the asset, bringing it to the
location and making it capable to work (e.g delivery, installation, testing costs), and
enhancements to the benefits of the asset. However, it is important to note that repairs are
charged as an expense for that period they took place.
All non-current assets except for freehold land have a finite useful life. At the end of the
asset’s useful life, the company will dispose of it and any amounts received represent its
residual value or scrap value. Depreciation is the consumption of non-current assets.
In order to calculate depreciation, you need to know asset cost, useful life and residual
value.
Depreciation expense is charged to the statement of profit or loss and there is two ways of
calculating depreciation. The straight-line method has the formula: (cost- residual
value)/expected useful life. The reducing balance method charges a fixed % of the brought
forward carrying amount of the asset. Therefore, the amount charges decrease over time.
Accumulated depreciation is the total amount of depreciation of previous periods up until
that point. The amount which appears in the statement of financial position is the carrying
amount which is cost- accumulated depreciation.
Which method used to calculate depreciation is decided based on the company’s use for the
asset. If it will be used evenly throughout its life, then the straight-line method is
appropriate. However, if the asset will be used a lot at the start of its life, then it slowly gets
used less, then the reducing balance method is better suited.
In order to correctly record the accounting for depreciation, we must set up a journal for
accumulated depreciation. We debit the depreciation expense which goes to the SPL and
credit the accumulated depreciation which goes to SFP. In the SFP the accumulated
depreciation is took away from the cost to derive the carrying amount.
If an asset’s useful life changes, carrying amount should be depreciated over the changed
remaining useful life considering of any remaining residual value. The same applies to a
change in residual value.
The depreciation method should always be reviewed and changed if it is not appropriate
anymore.
Assets can be worth less than their carrying amount. This requires writing off the additional
amount from the asset (impairment loss). The amount written off is immediately charged to
the SPL as an expense. If impairment takes place, depreciation should be calculated using
the new carrying amount and remaining useful life.
A non-current asset may be sold at the end of its useful life or before then. Because of this, it
no longer had the conceptual framework of an asset and must be removed from the
financial statement. A disposal account is therefore set up and the cost of asset is
transferred to it as well as accumulated depreciation and any proceeds to it. The disposal
account records the profit/loss made from the disposal. Profits are recorded in the SPL as
other income and losses are reported as admin expenses.
Capital expenditure is items bought for long-term use or non-current assets. Revenue
expenditure is short-term items which are bought and are charged to the statement of profit
or loss.
Non-current assets are either tangible or intangible. Tangible means that they can be
touched. (Intangible is not touched on this topic.)
The cost of non-current assets includes the amount to acquire the asset, bringing it to the
location and making it capable to work (e.g delivery, installation, testing costs), and
enhancements to the benefits of the asset. However, it is important to note that repairs are
charged as an expense for that period they took place.
All non-current assets except for freehold land have a finite useful life. At the end of the
asset’s useful life, the company will dispose of it and any amounts received represent its
residual value or scrap value. Depreciation is the consumption of non-current assets.
In order to calculate depreciation, you need to know asset cost, useful life and residual
value.
Depreciation expense is charged to the statement of profit or loss and there is two ways of
calculating depreciation. The straight-line method has the formula: (cost- residual
value)/expected useful life. The reducing balance method charges a fixed % of the brought
forward carrying amount of the asset. Therefore, the amount charges decrease over time.
Accumulated depreciation is the total amount of depreciation of previous periods up until
that point. The amount which appears in the statement of financial position is the carrying
amount which is cost- accumulated depreciation.
Which method used to calculate depreciation is decided based on the company’s use for the
asset. If it will be used evenly throughout its life, then the straight-line method is
appropriate. However, if the asset will be used a lot at the start of its life, then it slowly gets
used less, then the reducing balance method is better suited.
In order to correctly record the accounting for depreciation, we must set up a journal for
accumulated depreciation. We debit the depreciation expense which goes to the SPL and
credit the accumulated depreciation which goes to SFP. In the SFP the accumulated
depreciation is took away from the cost to derive the carrying amount.
If an asset’s useful life changes, carrying amount should be depreciated over the changed
remaining useful life considering of any remaining residual value. The same applies to a
change in residual value.
The depreciation method should always be reviewed and changed if it is not appropriate
anymore.
Assets can be worth less than their carrying amount. This requires writing off the additional
amount from the asset (impairment loss). The amount written off is immediately charged to
the SPL as an expense. If impairment takes place, depreciation should be calculated using
the new carrying amount and remaining useful life.
A non-current asset may be sold at the end of its useful life or before then. Because of this, it
no longer had the conceptual framework of an asset and must be removed from the
financial statement. A disposal account is therefore set up and the cost of asset is
transferred to it as well as accumulated depreciation and any proceeds to it. The disposal
account records the profit/loss made from the disposal. Profits are recorded in the SPL as
other income and losses are reported as admin expenses.
