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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

B1. Objective of charging


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.

B1. Objective of charging


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.

B2. Accounting entries for


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

B2. Accounting entries for


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.

B2. Accounting entries for


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

B2. Accounting entries for


depreciation
Exhibit 3.4

Accumulated Depreciation: Lorries


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

$
3,750

B2. Accounting entries for


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

B2. Accounting entries for


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

B2. Accounting entries for


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

B2. Accounting entries for


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

B2. Accounting entries for


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.

D. Disposal of noncurrent 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.

D. Disposal of noncurrent assets

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

D. Disposal of noncurrent assets

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

D. Disposal of noncurrent assets

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

D. Disposal of noncurrent assets

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

D. Disposal of noncurrent assets

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)