Depreciation
Where is depreciation never recorded?
Depreciation is never recorded on the credit side of the non-current asset (at cost) account. The provision for depreciation account acts as the credit side of the non-current asset account when recording depreciation...(it is a contra asset) Debit: Depreciation Expense/Income Statement Credit: Provision for or accumulated depreciation (total previous years of depreciation expense)
What is depreciation?
Depreciation is the portion cost of a non-current asset expended or used up during each accounting period in order to generate income for a firm. Depreciation is a non-cash expense.
Steps to calculating depreciation
1. Identify method to be used. 2. Pick out the key information. 3. Remember depreciation is calculated at the END of each financial period.
What are the names of the 3 methods used to calculate depreciation.
1. Straight line method 2. Reducing value method 3. Revaluation method
What is a revenue expense
A regular expense
Explain the Accrual principal
All expenses incurred to generate revenue for the accounting period MUST be recorded.
Annual vs Annually in accounting. What is the difference?
Annual: for 1 year (depreciation expense) Annually: more than one year (provision for depreciation)
What is capital expenses
Any expense incurred to improve the non-current asset in productivity or increases its value. E.g repairs to a car is a revenue expense because it prints the car back to its original state but shipping costs of a car is a capital expense because it allows you to be able to use the car so it increases its productivity.
When is depreciation calculated?
At the end of each financial period/year.
The straight line method
Cost of fixed assets less estimated scrap/residual value. Then divide by the estimated useful life of the fixed asset. OR Cost of the fixed asset x annual rate of the depreciation
Double entry for recording depreciation
Debit: Depreciation Expense (Income Statement) Credit: Provision for/ accumulated depreciation.
How do you use the disposal account to find a gain or loss?
If the 'Income Statement' in details is on the debit side, it is a gain. If is on credit side - it is a loss.
What are 2 of the meanings of gains and losses in the disposal account?
If you get a gain, that means your depreciation rate is too high. If you get a loss, your depreciation rate is too low. If you get neither a gain nor loss (both sides are equal) then your depreciation rate is accurate. Another way to interpret it is a gain means you make 'profit' and a loss means you didn't.
Revaluation method
Net book value at start + additions during the year - disposal during the year - net book value at close
The reducing (diminishing) balance method
Net book value of non-current asset x rate of depreciation Net book value= cost of non-current asset less provision for/ accumulated depreciation (total depreciation charge for previous years)
If a question says: Complete the following extract from Paula's Statement of Financial Position at 31 March 2007, how many financial periods/years does the question refer to/ want you to record?
Only one! The year ended: 31 March 2007. If it wanted us to refer to more than one year, it would say '...at 31 March 2007 AND 31 March 2008 etc).
What is meant by Provision for depreciation
Provision for depreciation refers to all of the accumulated depreciation for the non-current asset - not just the depreciation from the financial period. (See picture of account in notes).
Explain the Prudence principal
Prudence requires hat assets must not be overstated. Therefore all decreases in the value of assets must be recorded as expenses.
Statement of Financial Position
See picture in notes* Column Headings would be: 1. Non-current asset (e.g. motor car) 2. Cost (e.g. $450,000.00) 3. Provision for Depreciation (e.g. $72,000.00) 4. Net book value (e.g. 378,000.00) *This would be calculated yearly with the provision for depreciation and net book value changing each time. Once the non-current asset is disposed of, you will stop recording depreciation.
What is meant by depreciation expense?
The depreciation incurred for one specific financial period - not the accumulated depreciation. (See picture of account in notes).
What makes up the cost of non-current assets?
The net purchase price; all one off expenses to bring the asset to the place and state where it is to be used; improvement expenses - these increase value or productivity capacity of the asset; legal fees to get the asset; installation fees; fee to paint logo of business on asset.
What does 'disposal' mean?
To get rid of.
Why do things depreciate?
Use, wear and tear, obsolescence, and time.
