Accounting Fundamentals: Chapter 10 - Non-Current Assets & Depreciation

Capital expenditure

Spending money on things the business will use for more than 1 year

Revenue expenditure

Day-to-day costs, like repairs or maintenance, charged straight to profit/loss.

Costs of a NCA

Purchase price + costs to bring good to use (delivery, installation, etc.)

Useful life

How long the business expects to use the asset

Depreciation

Spreading the cost of an asset over its useful life.

Why we charge depreciation

To match the cost of the asset with the profit it helps generate.

Which non-current assets are depreciated?

All tangible (physical) assets except land.

Accumulated depreciation

The total depreciation charged on an asset so far.

Carrying amount + Formula

What the asset is worth on the balance sheet:
Carrying amount = Cost − Accumulated depreciation

Residual value

The amount you expect the asset to be worth at the end of its useful life

Depreciable amount + Formula

How much of the asset’s cost we can write off:
Depreciable amount = Cost − Residual value

Straight line depreciation + Formula

An equal depreciation charge each period.

Formula:
Depreciable amount ÷ Useful life

Reducing balance depreciation definition

• “Balance” = the current value of the asset (what’s left after last year’s depreciation).

• Reducing Balance Depreciation = taking a fixed % off what the asset is worth now, every year.

How to reduce the Balance Depreciation (Formula)

• A fixed % of the asset’s remaining value each year.

• Formula:
  Carrying amount = Cost × (1 − rate)^years used

  • Cost → original price

  • Rate → % it loses each year (decimal)

  • Years → how long it’s been used

Double entry for depreciation

• Dr Depreciation expense (P/L)

• Cr Accumulated depreciation (SOFP)

Disposal formula + Profit or loss on disposal

• Proceeds − Carrying amount

• When a business gets rid of a non-current asset

• Record profit in other operating income

• Record loss in operating expenses.

Steps to record disposal

Step 1: Remove cost of the asset

• Dr Accumulated depreciation (so you clear it off the books)

• Cr Asset account (to remove original cost)

Step 2: Record proceeds (money received)

• Dr Cash/Bank (amount received from sale)

Step 3: Record profit or loss

• If proceeds > carrying amount → Cr Profit on disposal (P/L)

• If proceeds < carrying amount → Dr Loss on disposal (P/L)

Part-exchange

• Trading in an old asset as partial payment for a new one.

• Trade-in value = disposal proceeds

Cost of new asset in part-exchange

Cost = Price paid + Trade-in value

Asset register

List of all non-current assets a business owns.

Intangible asset

Long-term assets with no physical form (e.g., patents, software).

Research costs

Always expensed (don’t capitalise).

Development costs

Capitalise only if criteria met, then amortise over time.