Chapter 15 and 16 Flashcards
(23 cards)
Cost of a Non Current Asset
All costs incurred in order to bring the asset into a location and condition ready for use that will provide a benefit for the life of the asset
why is the purchase of a NCA not put in the creditors control account?
Creditors control account is only for the amounts owed for the purchase of stock.
it is still recorded in the balance sheet, and still a liability
Depreciation
the allocation of a cost of a non current asset of its useful life
Depreciation expense
The part of the cost of a NCA that has been consumed in the current reporting period
Accumulated depreciation
the value of a NCA that has been consumed/incurred over its life thus far
straight line method
assumes that the asset will contribute evenly to revenue over its useful life
attempts to match revenue earned to expenses incurred
Reducing Balance method
assumes that the asset will contribute more to revenue at the start of its life, when it is new, efficient and productive
allocates more depreciation at the start of the assets life
Calculated: carrying value times depreciation rate
similarities of methods of depreciation
reporting is the same (still and expense in the income statement
the effect on the accounting equation
-increase acc. Dep., decrease in assets
-increase expense, decrease net profit , decrease OE
end depreciation expense is the same
differences for methods of depreciation
straight line= depreciation expense will stay the same each year (consumed evenly)
Reducing balance= expense higher at the start and decrease as the asset ages
how to select a depreciation method
straight line= if asset contributes evenly to revenue (cost consumed evenly of its life)
Reducing balance= contributes more to revenue at the start of its life (cost is consumed less as it ages, generally moving parts
Accounting principle for Depreciation
consistency- demands that once a method is chosen that method should be used from one period to the next
Qualitative characteristic for depreciation
comparability-allows reports to be compared from one period to the next
Define trade in
when a firm uses the proceeds from the sale of a NCA to reduce the amount payable for the purchase of a new NCA
Profit on Disposal
where the proceeds from the disposal of an asset are greater than its carrying value
loss on disposal
where the proceeds from the disposal of an asset is less than its carrying value
Define Under depreciation
occurs when insufficient depreciation has been allocated over the life of the asset, so that the carrying value of the asset is overstated
reason for loss on disposal
estimate residual value was to high (E.g-did not anticipate that the asset would be damaged)
Estimated useful life was to high (E.g- original estimates did not predict asset to be outdated)
Define Over depreciation
occurs when excess depreciation has been allocated over the life of of the asset, so that the carrying value of the asset is understated
reasons for profit on disposal
estimated residual value was to low (E.g- the original estimate did not anticipate that the asset would be in good condition, or original estimates did not anticipate that the asset would be in high demand)
estimated useful life was to low
Define Prepaid revenue
revenue received but yet to be earned
Define accrued revenue
a revenue that has been earned but not yet received
Accrued revenue VS Debtors Control
similar as they are both CA
Both revenue before cash received- resource controlled by the entity
Accrued revenue is a transaction other then sales
–> memo not invoice
carrying value
the value of a non current asset that is yet to be consumed/allocated as an expense plus any residual value
