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# Depreciation of

Non-current Assets

E3 Depreciation of
Non-current Assets
Learning objectives
After studying this topic, you should be able to:
(A)Distinguish between capital expenditure and
revenue expenditure
(B)Explain the objective of charging depreciation
(C)Calculate the amount of depreciation under
different methods

E3 Depreciation of
Non-current Assets
Learning objectives
After studying this topic, you should be able to:
(D) Show the entries for depreciation and disposal
of non-current assets
(E) Prepare financial statements with depreciation
charges and the profit or loss on disposal of
non-current assets

A. Types of expenditures
1. Capital expenditure
2. Revenue expenditure

A. Types of expenditures
Complete the notes and exercises (Part A)

## B1. Objective of charging

depreciation

Matching concept

The _________
expenses recognised in each
accounting period have to be matched with
the _________
revenues or benefits that they generate
in the same period.
A non-current asset provides _________
long-term
benefits and therefore its cost should not be
wholly recognised as an expense in the period
of __________.
acquisition

depreciation

Matching concept

## Instead, it should be allocated over its

_________.
useful life
The amount allocated to each accounting
period should be matched with the amount of
________
benefits generated in that period.

depreciation

## Depreciation is the systematic allocation of

the cost of a _______________________
tangible non-current asset over
its useful life.
When an entity acquires a non-current asset,
the cost of the asset is a _______
capital expenditure
and should therefore be allocated over periods
in which the asset is used.
In each accounting period, a portion of the
depreciation
cost of the asset is written off as ___________
charges.

depreciation

## Two separate accounts, called depreciation

___________
accumulated depreciation would be
and _______________________,
opened to record the depreciation charged for
an accounting period and the accumulated
depreciation to date respectively.
Each class of non-current assets should have
its ____
own depreciation account and accumulated
depreciation account.

## B2. Accounting entries for

depreciation
To achieve ____________,
consistency the same
depreciation method and policy should be
applied to all non-current assets in the same
class.

## The depreciation account can also be called

the depreciation expense account or
depreciation charges account.
It is an ________
expense account. Its balance will
profit and loss
be transferred to the _____________
account at the end of an accounting period.

## B2. Accounting entries for

depreciation
The accumulated depreciation account is
actually a contra-asset
___________ account.
It is used together with the
________________
non-current asset account in order to
determine the _____________
net book value of noncurrent assets.

## B2. Accounting entries for

depreciation
Step 1: Record the depreciation charged
for an accounting period

Dr Depreciation account
Cr Accumulated depreciation account
Step 2: Transfer the total of depreciation
charged to the profit and loss account at the
end of the accounting period
Dr Profit and loss account
Cr Depreciation account

depreciation

## The balance of the accumulated depreciation

account would be _________
deducted from the cost of the
___________
non-current assets in the balance sheet at the
end of the period to arrive at the ________
net book value.

depreciation
Exhibit 3.4

## Suppose Firm A bought a lorry for \$16,000 on

1 January 2009 and adopted the straight-line
method of depreciation. If the lorry was
estimated to have a useful life of four years and
a residual value of \$1,000.
The amount of depreciation charged in each of
the four years in use would be \$3,750.
The depreciation charged on the lorry for the years
ended 31 December 2009, 2010 and 2011 would
be recorded and shown as follows:

## B2. Accounting entries for

depreciation
Exhibit 3.4

2009
Dec 31 Acc. dep

Depreciation: Lorries
\$ 2009
3,750 Dec 31 Profit and loss

\$
3,750

depreciation
Exhibit 3.4

## Accumulated Depreciation: Lorries

2009
\$ 2009
Dec 31 Balance c/f
3,750 Dec 31 Depreciation

\$
3,750

depreciation
Exhibit 3.4

## Income Statements for the years ended 31 December (extract)

2009
2010
2011
\$
\$
\$
Expenses:
Depreciation: Lorries
3,750
Balance Sheets as at 31 December (extract)
2009
2010
\$
\$
Non-current assets
Net book
Lorries at cost
16,000
Less Accumulated depreciation
(3,750)
12,250

2011
\$

value

## B2. Accounting entries for

depreciation
Exhibit 3.4

2009
Dec 31 Acc. dep
2010
Dec 31 Acc. dep

Depreciation: Lorries
\$ 2009
3,750 Dec 31 Profit and loss
2010
3,750 Dec 31 Profit and loss

\$
3,750
3,750

depreciation
Exhibit 3.4

## Accumulated Depreciation: Lorries

2009
\$ 2009
Dec 31 Balance c/f
3,750 Dec 31 Depreciation
2010
2010
Dec 31 Balance c/f
7,500 Jan 1 Balance b/f
Dec 31 Depreciation
7,500

\$
3,750
3,750
3,750
7,500

depreciation
Exhibit 3.4

## Income Statements for the years ended 31 December (extract)

2009
2010
2011
\$
\$
\$
Expenses:
Depreciation: Lorries
3,750
3,750
Balance Sheets as at 31 December (extract)
2009
2010
\$
\$
Non-current assets
Lorries at cost
16,000
16,000
Less Accumulated depreciation
(3,750)
(7,500)
12,250
8,500

2011
\$

## B2. Accounting entries for

depreciation
Exhibit 3.4

2009
Dec 31 Acc. dep
2010
Dec 31 Acc. dep
2011
Dec 31 Acc. dep

Depreciation: Lorries
\$ 2009
3,750 Dec 31 Profit and loss
2010
3,750 Dec 31 Profit and loss
2011
3,750 Dec 31 Profit and loss

\$
3,750
3,750
3,750

depreciation
Exhibit 3.4

## Accumulated Depreciation: Lorries

2009
\$ 2009
Dec 31 Balance c/f
3,750 Dec 31 Depreciation
2010
2010
Dec 31 Balance c/f
7,500 Jan 1 Balance b/f
Dec 31 Depreciation
7,500
2011
2011
Dec 31 Balance c/f
11,250 Jan 1 Balance b/f
Dec 31 Depreciation
11,250

\$
3,750
3,750
3,750
7,500
7,500
3,750
11,250

depreciation
Exhibit 3.4

## Income Statements for the years ended 31 December (extract)

2009
2010
2011
\$
\$
\$
Expenses:
Depreciation: Lorries
3,750
3,750
3,750
Balance Sheets as at 31 December (extract)
2009
2010
\$
\$
Non-current assets
Lorries at cost
16,000
16,000
Less Accumulated depreciation
(3,750)
(7,500)
12,250
8,500

2011
\$
16,000
(11,250)
4,750

## B. Depreciation of noncurrent assets (Accounting

entries)
Complete the notes and exercises (Part B)

C. Commonly used
depreciation methods
1. Straight-line method
2. Reducing-balance method
3. Usage-based method

C. Commonly used
depreciation methods
Complete the notes and exercises (Part C)

## D. Disposal of noncurrent assets

An entity may dispose of a non-current asset
before it reaches the end of its estimated
useful life
__________.
This could happen if the asset is sold,
damaged or lost in an accident.
In these situations, a separate account called
disposal would be opened to record the
_________
disposal of non-current assets.

Exhibit 3.5

## Suppose Firm A bought a lorry for \$16,000 on 1 January

2009 and adopted the straight-line method of depreciation.
The lorry was estimated to have a useful life of four years
and a residual value of \$1,000. It was sold for \$4,500 cash
on 1 January 2011.

Exhibit 3.5

## Step 1 Transfer the cost of the asset to the

disposal account:
Dr Disposal account
Cr Non-current asset account

2011
Jan 1 Lorries

Disposal: Lorries
\$ 2011
16,000

Exhibit 3.5

## Step 2 Transfer the accumulated depreciation on

the asset to the disposal account:
Dr Accumulated depreciation account
Cr Disposal account

2011
Jan 1 Lorries

Disposal: Lorries
\$ 2011
16,000 Jan 1 Acc. Dep

\$
7,500

Exhibit 3.5

## Step 3 Record the proceeds from disposal:

Dr Cash / Bank / Debtors account
Cr Disposal account

2011
Jan 1 Lorries

Disposal: Lorries
\$ 2011
16,000 Jan 1 Acc. Dep
Jan 1 Cash

\$
7,500
4,500

Exhibit 3.5

## Step 4 Transfer the profit/loss on disposal to the

profit and loss account:
Loss
Profit
Dr Profit and loss
Dr Disposal
Cr Disposal
Cr Profit and loss
2011
Jan 1 Lorries

Disposal: Lorries
\$ 2011
\$
16,000 Jan 1 Acc. Dep
7,500
Jan 1 Cash
4,500
Dec 31 Profit and loss
Loss on disposal 4,000
16,000
16,000

Exhibit 3.6

## Suppose Firm A bought a lorry for \$16,000 on 1 January

2009 and adopted the straight-line method of depreciation.
The lorry was estimated to have a useful life of four years
and a residual value of \$1,000. The old lorry was traded in
for a new one on 1 January 2011. The trade-in value of the
old lorry was \$5,000 while the cost price of the new lorry was
\$30,000. The balance was paid in cash one week later.
The entries to record the payment for the new asset with the trade-in
allowance deducted from the cost price are:
Dr Non-current asset account (cost price of the new asset)
Cr Cash/Bank/Creditors account (amount paid for the new
asset)
Cr Disposal account (amount of trade-in allowance)

D. Disposal of noncurrent
assets
The cost price of the new lorry (\$30,000) is equal

Exhibit 3.6

## to the trade-in value of the old lorry (\$5,000) plus

the cash payment of the balance (\$25,000).
Lorries
2011
\$ 2011
\$
Jan 1 Balance b/f
16,000
Jan 1
Disposal
16,000
30,000
1 Disposal Trade-in value 5,000 Dec 31 Balance c/f
8 Cash
25,000
General Ledger

46,000

2011
Jan 1 Lorries

46,000

Disposal: Lorries
\$ 2011
\$
16,000 Jan 1
Accumulated depreciation 7,500
1
Cash
5,000
Dec 31 Loss on disposal
3,500
16,000

16,000

## D. Disposal of noncurrent assets

Complete the notes and exercises (Part D)