ACCOUNTING FOR NON CURRENT ASSETS

Accounting 3/4 with Baron at Haileybury College

About this deck

By: Vicki Baron
Created: 2012-02-20
Size: 32 flashcards
Views: 130

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Referring to the definitions, identify the characteristics common to both assets and expenses

Assets, in common with expenses, are necessary to help earn revenue and generate profit. They both refer to the economic benefit that is brought to the business

Explain the key difference between an asset and an expense

An asset is defined as future economic benefit, while an expense is defined as the consumption of an economic benefit. That is, expenses refer to economic benefit that has already been consumed, whereas assets refer to economic benefits that are yet to be consumed

Identify the characteristics of a depreciable non-current asset

Depreciable assets have a finite life, and will be useful for a fixed period of time

Explain why it is not necessary to calculate depreciation for assets such as land

Assets that have an infinite life should not be depreciated, as they may be used, but are never ‘used up’ or consumed

Referring to one accounting principle, explain why the entire cost of a non-current asset should not be reported as an expense

When a business purchases a non-current asset, it is clearly classified as such as the benefit will be provided for more than 12 months. It cannot be reported as an expense as its entire benefit has not been consumed in the current Reporting Period

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.

Define the term ‘depreciation’

Depreciation is the allocation of the cost of a non-current asset over its useful life

Define the term ‘depreciation expense’

Depreciation expense is the part of the cost of a non-current asset that has been consumed in the current Reporting Period

Referring to one accounting principle, explain the purpose of depreciating a non-current asset

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.

Explain the effect of depreciation on a firm’s bank balance

Depreciation has no effect on a firm’s bank balance because depreciation does not involve any payment of cash. The cash payment relating to each non-current asset will be recorded only at the time when the asset is purchased

Explain the assumption that underlies the straight-line method of depreciation

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.

State the formula for calculating depreciation using the straight-line method

Depreciation expense ($ per annum) = HC – RV/Life

Define Historical Cost

the original purchase price of the non-current asset + all once off costs asociated with getting the asset ready for use

Define Residual Value

the estimated value of the non-current asset at the end of its useful life

Define 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.

Explain why each non-current asset must be depreciated individually rather than as a total

Because each non-current depreciable asset is different in terms of its useful life and residual value, each must be depreciated individually

Referring to one accounting principle, explain why residual value is deducted from Historical Cost when calculating depreciation using the straight-line method

Residual value is deducted from the historical cost, as this is the amount that will not be consumed by the business, but by another entity

State one reason why the ledger accounts must name the asset being depreciated

Given that most businesses will depreciate more than one non-current asset, it is imperative to identify precisely which asset is being depreciated

Referring to one accounting principle, explain the difference between depreciation expense and accumulated depreciation

Whereas depreciation expense refers to the amount consumed in the current Reporting Period, accumulated depreciation refers to depreciation that has accumulated over the life of the asset so far (over a number of Reporting Periods)

State two reasons why the Depreciation expense account must be closed at the end of the Reporting Period

· to transfer Depreciation Expense to the Profit and Loss Summary account in order to calculate profit for the current Reporting Period

and to reset the Depreciation Expense account to zero in preparation for the next Reporting Period

Explain why the original purchase price of a non-current asset must be disclosed in the Balance Sheet

In order to keep the reports free from bias, the asset must always be reported initially at its Historical Cost (its original purchase price), as this amount is verifiable by reference to a source document

State one reason why the Accumulated Depreciation account is balanced at the end of the Reporting Period

Accumulated Depreciation is a negative asset account and is an ongoing account; its balance will be carried forward to the next Reporting Period

Define Carrying Value

Carrying value is the value of a non-current asset that is yet to be consumed/allocated as an expense, plus any residual value

Explain why non-current assets must be reported at their carrying value in the Balance Sheet

The carrying value is reported in the Balance Sheet as this is information that is useful for decision-making for the owner (Relevance). For example, the owner will be able to see if the asset is nearing the end of its useful life (low carrying value) and may need replacement

Show the formula for calculating the rate of depreciation

Depreciation rate (% per annum) = Depreciation expense/Historical Cost x 100

Define the term ‘cost’ as is relates to non-current assets

The cost of a non-current asset is defined as all costs incurred in order to bring the asset into a location and condition ready for use, which will provide a benefit for the life of the asset

Identify three costs that might be included in the cost of a non-current asset

· the purchase price/supplier’s price

· delivery costs

· modification costs

· installation costs

Explain why GST is excluded from the cost of a non-current asset

GST is excluded because it actually represents a reduction in the GST liability owed to the ATO and does not become part of the cost of a non-current asset

Explain why yearly costs are excluded from the cost of a non-current asset

Yearly costs are excluded as their benefit will be consumed within a year, and so they do not fit the definition of the ‘cost’ of a non-current asset

Explain how depreciation can undermine the Reliability of accounting reports

When calculating depreciation, the residual value and the useful life of the non-current asset are estimates, and are therefore not based on verifiable evidence. This makes the accounting reports not free from bias

Explain how depreciation ensures relevance in the Income Statement

· 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

Explain how depreciation ensures relevance in the Balance Sheet

By showing accumulated depreciation in the Balance Sheet, it ensures that assets are shown at their carrying value, which is vital for decision-making about their replacement.

About this deck

By: Vicki Baron
Created: 2012-02-20
Size: 32 flashcards
Views: 130

About StudyBlue

“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis