Ch.14 Accounting for Non-Current Assets

What is a non-current asset?

An economic resource controlled by the business that is not held for resale and is expected to provide economic benefits for more than the next 12 months.

What is a depreciable asset?

A non-current asset with a finite life whose cost is allocated as depreciation over its Useful life.

What is depreciation?

The allocation of the cost of a non-current asset over its Useful life.

What is depreciation expense?

The part of the cost of a non-current asset that has been incurred/consumed in the current Period.

How does depreciation uphold the Accrual basis assumption?

It recognises as an expense only the part of the asset's cost consumed in the current Period, allowing revenues earned to be matched against expenses incurred.

Does recording depreciation affect Bank?

No. Depreciation is a non-cash balance day adjustment.

Why is GST excluded from depreciation calculations?

GST is recorded in GST Clearing and does not form part of the cost of the non-current asset.

What does the straight-line method assume?

The asset contributes evenly to revenue over its Useful life, so the same depreciation expense is recognised each year.

What is the straight-line depreciation formula?

Depreciation expense per annum = (Historical cost − Residual value) ÷ Useful life.

What is Historical cost?

The original cost of the non-current asset, including costs necessary to bring it into a location and condition ready for use.

What is Residual value?

The estimated value of the non-current asset at the end of its Useful life to the current entity.

What is Useful life?

The estimated period for which the current entity expects to use the non-current asset to earn revenue.

Why is Residual value deducted from Historical cost?

It represents the part of the asset's value that will remain when the current entity finishes using it and therefore will not be consumed by the current entity.

Why is depreciation not completely Verifiable?

Useful life and Residual value are estimates and therefore cannot be verified with complete certainty.

Why should depreciation still be recorded despite using estimates?

Recording an estimate gives a more Faithful representation than omitting depreciation, which would understate expenses and overstate profit and assets.

How is depreciation calculated when an asset is owned for only part of a year?

Annual depreciation expense × number of months owned ÷ 12.

Why must depreciation be calculated pro rata for part of a year?

Only the depreciation expense incurred while the business controlled the asset in the current Period should be recognised.

What is the General Journal entry for depreciation?

Dr Depreciation of [Asset]; Cr Accumulated depreciation of [Asset].

What is Accumulated depreciation?

A negative asset account recording the total depreciation expense accumulated over the life of the asset so far.

Why is the asset account itself not credited when depreciation is recorded?

The asset remains recorded at its Historical cost; the reduction in value is recorded separately in Accumulated depreciation.

What is the effect of depreciation on the Accounting equation?

Assets ↓; Liabilities no effect; Owner's equity ↓ because depreciation expense decreases Net Profit.

What happens to Depreciation expense and Accumulated depreciation at the end of the Period?

Depreciation expense is closed to Profit and Loss Summary; Accumulated depreciation is balanced and carried forward.

Where is depreciation expense reported?

Under Other expenses in the Income Statement.

How is a depreciable non-current asset reported in the Balance Sheet?

Historical cost less Accumulated depreciation equals Carrying value.

What is Carrying value?

Historical cost − Accumulated depreciation; it represents the value of the asset that has not yet been allocated as an expense.

What would happen if depreciation were omitted from the reports?

Expenses would be understated, Net Profit and owner's equity overstated, and non-current assets overstated, potentially misleading users.

What costs are included in the cost of a non-current asset?

Costs necessary to bring the asset into a location and condition ready for use that provide benefits over its life, such as supplier price, delivery, installation and modifications.

How is the cash purchase of a non-current asset classified in the Cash Flow Statement?

The cash paid for the non-current asset is an Investing cash outflow.