Chapter 4 ; Depreciation

The accruals concept

Costs incurred in a period should be matched in the statement of profit or loss with the income produced in the same period

Depreciation

The allocation of the depreciable amount of an asset over its useful life i.e the measurement of the cost of the non-current assed consumed in a period

Carrying amount

The carrying amount is the cost of the non-current asset less the accumulated depreciation to date

Factors to consider when depreciating non-current assets

Cost of the assembly

Useful life : period over which benefits are expected to be derived from the asset

Residual value : amount that the asset is expected to be sold for at the end of its economic life

What is straight line depreciation

Assumes that the asset is used consistently throughout its life, the depreciation charge is the same each year and the assets carrying amount is reduced by the same amount

1st way of calculating straight-line depreciation

(cost - residual value) / useful economic life

2nd way of calculating straight-line depreciation

(cost - residual value) x %

The diminishing balancing basis

This assumes that an asset generates less economic benefits as it gets older, for this reason depreciation falls each year

Way of calculating diminishing balancing basis

Carrying amount x diminishing balance % per annum

Depreciation on monthly basis

Annual depreciation should be apportioned by dividing the annual depreatio by 12 and multiplying by the number of months used till year end

Double entry depreciation

DR depreciation charges account (expense increasing)

CR accumulated depreciation (assets decreasing)