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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)
