Chapter 4: Depreciation

Question 1

What is the accruals concept?

Answer 1

The accruals concept is that costs should be recognised in the period they are transacted rather than when the income is received.

Question 2

Name the three factors to consider when depreciating non-current assets.

Answer 2

1. Cost of the asset
2. Useful life (period of which the asset will be useful)
3. Residual value (expected sale price at the end of useful life)

Question 3

What are the two ways of calculating straight-line depreciation?

Answer 3

1. (Cost - residual value) / useful life
2. (Cost - residual value) x %

Question 4

How is diminishing balance of depreciation calculated?

Answer 4

Carrying amount x diminishing balance % per annum

Question 5

How do you calculate depreciation on a pro-rata (monthly) basis?

Answer 5

Depreciate normally using either the straight-line or diminishing balance method and then multiply the answer by the fraction of time.

E.g. multiply by 6/12 if it was bought half way through the year.

Question 6

How is depreciation accounted for in the ledger accounts?

Answer 6

Dr Depreciation charges (SPL)
- because it’s an expense

Cr Accumulated depreciation (SPF)