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Flashcards in UNIT AOS 1 Deck (24):
1

Purpose Depreciation of a NCA

To calculate a accurate profit, this is done by comparing revenues earned and expenses incurred in the current reporting period. Depreciation recognise a expense only that part of the cost that has been consumed/ incurred in that current reporting period.

To calculate accurate profit

2

Two methods of calculating depreciation

- Straight line method
- Reducing balance method

3

Depreciation expense

The part of the cost of a NCA that has been consumed in the current reporting period

4

Deciding if you should use straight line method

- If the asset contributes evenly to revenue and its costs is consumed evenly, over its life the straight line method should be used

5

Deciding if you should use reducing balance method

- If the asset contributes more to revenue, an its cost is consumed more at the start of its life and less as it ages than the reducing balance method should be used..

6

Reducing Balance formula

Depreciation Expense= Carrying Value ( HC- Accumulated depreciation) X Depreciation rate

7

General Journal entry for Depreciation

Depreciation DR
Accumulate Depreciation CR

8

Where does Depreciation appear

- General Journal
- General Ledger

9

Straight line Formula

HC-RV Divided by the USEFUL LIFE

10

Affect of Depreciation on Accounting Equation

Assets: Decrease
Liabilities: No affect
Owners Equity: Decrease

11

Recording Depreciation in Income statement

- Under 'Other Expenses'

12

Disposal of NCA

Disposal of a NCA may be done at any time, businesses may dispose an NCA If
- it has been damaged or is not working properly
- never model has been developed
- cost of maintaining asset outweighs benefits
- it ha reached the end of its useful life.

13

Steps in Disposal of asset

1. Remove asset from the books of the business
2. As the asset has been removed from the books the accumulated depreciation associated with the asset also needs to be removed
3.record the amount received from the disposal of the assets in the CRJ
4. Calculate and record any profit or loss made on the sale of the asset

14

Disposal of NCA ( trade in)

1. Record the depreciation allocated to this asset for the period prior to the sale
2. Remove the asset from the books of the business
3. Remove accumulated depreciation associated with the asset
4. record the trade in of the old asset
5. Record profit of loss of asset
6. Record the purchase of the new asset

15

Accrued Revenue

Revenue that has been earned but not yet received

16

Prepaid sales Revenue

Prepaid sales is used when stock is involved and the customer has paid a deposit on the stock

17

Need for balance day adjustments

When calculating profit you need to compare the Revenue earned against the expenses incurred in the current reporting period
To calculate accurate profit

18

Types of balance day adjustments

- Stock Loss
- Depreciation
- Prepaid Expenses
-Prepaid Revenues
-Accrued Expenses
- Accrued Revenues

19

Definition of Revenue

Inflow of economic benefits ( or saving in outflows). In the from of an increase in assets or a reduction in liabilities that leads to an increase on OE

20

Recording disposal of NCA ( general journal)

Disposal of NCA DR
NCA CR

21

Recording accumulated depreciation (General journal)

Accumulated depreciation of NCA. DR
Disposal of NCA. CR

22

Recording loss on disposal (General Journal)

Loss on Disposal of NCA. DR
Disposal of NCA. CR

23

General journal entry for a trade in

Disposal of NCA. DR
NCA. CR
Accumulated depreciation of NCA. DR
Disposal of NCA. CR
Sundry Creditor- (name). DR
Disposal of NCA. CR
Loss on disposal of NCA. DR
Disposal of NCA. CR

24

Referring to one qualitative characteristic, explain why depreciation methods should not be changed for a particular non-current asset over its useful life.

Comparability: Changing accounting methods will mean that the reports will not be able to be compared from one Reporting Period to another: it will be unclear whether changes in depreciation expense are the result of changes in financial performance or simply changes in accounting methods.