Flashcards
Chapter 4
Cards in this deck (11)
- 1Capital expenditure - Expenditure which results in the acquisition of long term assets or an improvement in earning capacity. SOFP Revenue expenditure - Incurred either for trade purposes ( wages/ salaries/admin/repairs) or to maintain earning capacity of those assets. P&LCapital income and revenue income
Capital income - proceeds from sale of non-current assets. SOFP.
Revenue income - income from trading. P&L. - 2Non-current assets are those that have a useful life beyond one accounting period. Asset register - Listing of all NCA owned by an organisation broken down by asset type and other financial information.NCAs should be recorded at cost. Made up of purchase price (excluding sales tax & discounts but including import duty) and other directly attributable costs to bring the asset to its intended location and ready to use e.g. inward carriage, installation, testing, legal fees.
Cost of maintenance/not direct admin costs and staff training not included. - 3Depreciation -the systematic allocation of the cost or value of an assets minus residual value over its useful life. Useful life - estimated economic life of the non current asset (only asset with unlimited useful life is freehold land).Residual value - the scrap value at the end of the useful life (after full depreciation). Unless otherwise stated assume to be zero.
- 4Calculating depreciation 1. Charge for depreciation is an expense. 2. NCA is being worn out and consumed so the SOFP cost must be reduced by the same amount as the depreciation expense. Remnant is the carrying amount (cost less accumulated depreciation (NBV)).2 methods of depreciation
1. Straight line - depreciation charge is the same every year.
Depreciation = (Cost - Residual)/Useful life
Depreciation = (Cost - Residual) x depr%
Charge to the nearest month (pro rate) - 52. Reducing balance - depreciation charge is different each year as relates to NBV. Depreciation = depr% x NBV Note - Does not take into account residual value as NBV will never reach zero.Accounting for depreciation
Accumulated depreciation - Accumulated depreciation charge over the life of the asset.
Depreciation has dual effect - reduces value of asset in SOFP & is an expense in P&L.
Dr Depreciation expense
Cr Accumulated Depreciation - 6Depreciating asset enhancement expenditure is done over the original assets remaining useful life. e.g. Asset depreciated over 10yrs, yr 3 addition depreciated over 7 yrs so entire asset fully depreciated after 10yrs.Dep'n method should be consistent year on year but can be changed as should be reviewed annually. If the method is changed then the remaining carrying amount is depreciated under the new method over its remaining useful life.
- 7Depreciation charge on a NCA depends on cost, residual value and estimated useful life. Dep'n after change = (NBV - new residual value)/remaining useful lifeImpairment loss - When the value of an asset falls below the NBV and the fall in the value will not be recovered from future sale. Needs to be written down to its new value.
NBV - Reduced value = Impairment loss (expense) - 8Disposal of NCAs - Profit or loss on disposal is capital income/expenditure. When an NCA is disposed need to remove the NBV from the SOFP. Sales proceeds>NBV = Profit on disposal Sales proceedsSteps for disposal
1) Remove the cost of asset
Dr Disposals Cr NCA
2) Remove the accum dep'n to date
Dr Acc Depn Cr Disposals
3) Account for sales proceeds
Dr Cash Cr Disposals
4) Balance off disposals to find profit/loss.
Gain on disposal is shown as sundry income on P&L, loss as an expense. - 9Part exchange allowance -instead of receiving sales proceeds as cash a part exchange allowance against cost of replacement. Dr New asset cost Cr Disposal account Takes the place of proceeds in the disposal account.Intangible NCAs - assets with no physical presence i.e. intellectual property, goodwill.
Amortised (same as depreciation). - 10Goodwill - value of the business as a going concern > book value of assets. Can only be recorded as an asset if purchased goodwill (excess paid to take over a Co). NOT AMORTISED.Development costs - two stages
1) Research stage - debit balance classified as an expense and go to P&L. Writing off expenditure.
2) Development stage - intangible asset. Known as capitalising the asset. Should only be recorded when entity is confident the expenditure will generate future profits. PIRATE criteria.
Dr NCAs Cr Cash/payables - 11Pirate Criteria P - Probable future economic benefit. I - Intention to complete project. R - Resources available to complete project A - Ability to sell product T - Technical ability to complete E - Expenditure can be measured reliably
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- Flashcards on Chapter 4, created by Sam Dillon on 05/09/2015.
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- Sam Dillon
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