Explain why GST is excluded from the consideration of depreciation.
GST is excluded because it is not included in the cost of a non-current asset; it actually represents a reduction in the GST liability owed to the ATO.
Because a non-current asset is not consumed entirely within the one Reporting Period, depreciation is an attempt to calculate how much of the asset’s value has been consumed in the current Reporting Period.
The straight-line method of depreciation assumes that non-current assets contribute evenly to revenue. Given that it assumes that the value of the non-current asset is consumed evenly over its life, the depreciation expense is the same every year.
Depreciation expense ($ per annum) = HC – RV/Life
the estimated value of the non-current asset at the end of its useful life
The estimated period of time for which the non-current asset will be used by the current entity to earn revenue. This is usually measured in years.
· to transfer Depreciation Expense to the Profit and Loss Summary account in order to calculate profit for the current Reporting Periodand to reset the Depreciation Expense account to zero in preparation for the next Reporting Period
Depreciation rate (% per annum) = Depreciation expense/Historical Cost x 100
· the purchase price/supplier’s price
· delivery costs
· modification costs
· installation costs
· depreciation ensures that the Income Statement includes all information that is useful for decision-making about profit, by showing the consumption of non-current assets in the current Reporting Period