DEPRECIATION OF NON-CURRENT ASSETS

LEARNING OUTCOMES
At the end of the session, students are able to: Explain the term of depreciation; Explain the reasons for charging depreciation; Identify and explain the causes of depreciation; Calculate depreciation expense using either the straight line or reducing balance method; Account for depreciation expense in the book; Show the depreciation charges in the income statement; and Show the accumulated depreciation charges in the balance sheet.
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NON-CURRENT ASSETS
Intended to be used in the business. Not intended for resale. More permanent in nature. Examples;
Land and building Machinery and equipment Motor vehicles Furniture and fixtures
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COST OF NON-CURRENT ASSETS

Determination is based on the concept of capital and revenue expenditure. Any cost incurred to bring the assets ready for its intended use; capital expenditure. Example; cost of motor vehicle comprises of:
Price of motor vehicle Delivery charges Plate no and painting of businesss name or logo

Cost to run the assets for daily business operation; revenue expenditure. Example; expenses of running a motor vehicle:
Road tax and insurance Petrol Repairs
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RECORDING OF NON-CURRENT ASSETS

In the balance sheet;
Net Book Value (NBV); value of asset at the end of a period NBV = Cost accumulated depreciation

In the income statement;

Expenses related to the assets;
Insurance, road tax, petrol and repairs.

Expenses using of the assets;

Known as depreciation expenses.
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DEPRECIATION
FRS 114 defines as;
the allocation of the depreciable amount over its estimated useful life

Depreciable amount = cost salvage/residual value/end value Estimated useful life; expected years of usage
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REASONS FOR CHARGING DEPRECIATION

Matching concept; to match the revenue for the period against cost incurred in earning up the revenue. Conservatism concept; never overstated assets value. Depreciation expenses (non-monetary expense) reduces profit; funds are created for the replacement cost of the asset.
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CAUSES OF DEPRECIATION
Wear and tear; corrosion, rot, rust, decay, etc. Obsolescence; out of date/obsolete due to technological advancement. Physical factors; inefficient capacity. Defluxion of time; limitation of ownership on patents and copyrights. Depletion; decrease in value of mines and quarries.
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DETERMINATION OF DEPRECIATION
Factors to be considered;
Cost of non-current asset Useful life of the asset Scrap/salvage/residual/end value of asset

Methods;
Straight line method Reducing balance method
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STRAIGHT LINE METHOD

The amount of depreciation for each accounting period will be the same Flat rate Depreciation per year = cost estimated scrap value estimated useful life OR = % (Cost estimated scrap value)
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REDUCING BALANCE METHOD

Greater amount of depreciation is being charged in the earlier accounting years and smaller amount in the later. Depreciation for the year = % x NBV = % (cost accumulated depreciation)

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WORKED EXAMPLE (1)

Non-current asset Cost Estimated useful life Scrap value Using SLM; Depreciation per year = 45,000-5,000 8 = RM5,000
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= = = =

Van RM45,000 8 years RM5,000

WORKED EXAMPLE (2)

Non-current asset Year of purchase Cost Depreciation rate = = = = Office equipment 2009 RM24,000 10% pa

Using RBM; Depreciation for the year 2009 = 10% (24,000-0) = RM2,400 Depreciation for the year 2010 = 10% (24,000-2,400) = RM2,160
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WORKED EXAMPLE (3)

Trial Balance as at 31/12/2010 (extract) DR CR Motor vehicle 34,750 Fixtures and fittings 24,250

Additional information as at 31/12/2010: Depreciation is to be provided at

Motor vehicle; 20% pa on reducing balance Fixtures and fittings; 10% pa on straight line
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CALCULATION
Depreciation for the year (motor vehicles) = 20% (34,750-0) = RM6,950 Depreciation per year (fixtures & fittings) = 10% (24,250) = RM2,425

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Income statement for the year ended 31/12/2010 (extract) RM RM RM Operating expenses Depreciation on motor vehicle Depreciation on fixtures & fittings 6,950

2,425

Balance sheet as at 31/12/2010 (extract) RM RM Non-current assets cost Accumulated depreciation Motor vehicle 34,750 (6,950) Fix&fittings 24,250 (2,425)

RM NBV 27,800 21,825

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WORKED EXAMPLE (4)

Trial Balance as at 31/12/2011 (extract) DR Motor vehicle Fixtures and fittings Accumulated depreciation on MV Accumulated depreciation on F&F 34,750 24,250 6,950 2,425 CR

Additional information as at 31/12/2011: Depreciation is to be provided at

Motor vehicle; 20% pa on reducing balance Fixtures and fittings; 10% pa on straight line
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CALCULATION
Depreciation for the year (motor vehicles) = 20% (34,750-6,950) = RM5,560 Depreciation per year (fixtures & fittings) = 10% (24,250) = RM2,425

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ACCOUNT

YEAR-END BALANCE

ADJUSTMENT

BALANCE AFTER ADJUSTMENT 12,510

Accumulated depreciation on MV Accumulated depreciation on F&F

6,950

+ 5,560

2,425

+ 2,425

4,850

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Income statement for the year ended 31/12/2011 (extract) RM RM RM Operating expenses Depreciation on motor vehicle Depreciation on fixtures & fittings 5,560

2,425

Balance sheet as at 31/12/2011 (extract) RM RM Non-current assets cost Accumulated depreciation Motor vehicle 34,750 (12,510) Fix&fittings 24,250 (4,850)

RM NBV 22,240 19,400

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JOURNAL ENTRIES
TRANSACTION DR CR

a To record purchase of non-current asset

b To record depreciation for the year

Non-current asset
Depreciation expenses

Cash/creditor

Accumulated depreciation

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