INTERNATIONAL

ADVANCED LEVEL
ACCOUNTING

LECTURE NOTES
- NON-CURRENT ASSET DEPRECIATION –

DEPRECIATION OF TANGIBLE NON-CURRENT ASSETS

Depreciation (or, amortisation) is an expense. It is that part of the original cost of a non-
current assets (i.e. 7ixed assets) that is consumed during its period of use by the business
(or known as, useful economic life).

The causes of depreciation are as follows:

physical
economic factors time depletion
deterioration
wear and tear (e.g. obsolescence (i.e. For example: Wasting
machinery and out of date) • legal life 7ixed character, likely
building) in terms of due to extraction
years of raw materials
erosion, rust and rot inadequacy (i.e. an
• patent (e.g. mine,
(e.g. land or wood) asset is no longer
quarries and oil
used because of the
well)
growth and changed
in the size of the
business

The characteristics of depreciation of non-current assets are:

(1) Non-cash accounting transaction
(2) Method of calculating the cost of using the assets (not a method of valuing the assets)
(3) Not a fund for replacement


METHODS OF CALCULATING DEPRECIATION CHARGES

depreciation charge
Cost & residual value
straight line 5ixed amount for every year =
useful economic life

reducing balance carrying value (or net book value) × depreciation rate (%)

decrease in value
revaluation
(there is no 7ixed %, while the carrying value = valuation)

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ACCOUNTING

The considerations of choose the methods of depreciation and effects on pro7its are:

Most appropriate when… Effects on Pro9it… Usually used on:
• the asset is expected to
earn revenue for the • reduced by the
business evenly over its same amount in
straight line motor vehicles
useful life every accounting
• the asset has clearly period
de7ined 7ixed life

• the earning power of

the asset is expected to • lower in early
reducing diminish with age years as the plant and
balance • maintenance costs are depreciation will machinery
taken into be greater
consideration

small but
• unreasonable to keep important item,
revaluation detailed record (due to –– e.g. tools in of7ice,
the nature of the asset) home of7icer
printer


DOUBLE-ENTRY RECORDS FOR DEPRECIATION AND PROVISION FOR
DEPRECIATION

To record the purchase of the van and the depreciation of the 7irst three years:

Step 1: Record the purchase in the non-current asset account

DR Non-current asset account (cost)
CR Bank or cash

Step 2: Calculate the annual depreciation charge

Step 3: Open a provision for depreciation account

Step 4: Record the entries for depreciation in the provision for depreciation
account

DR Statement of P/L
CR Provision for depreciation
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ACCOUNTING


RECORD THE SALE OF A NON-CURRENT ASSET

When a non-current asset is sold, it is necessary to:


Step 1: Open a disposal of non-current assets account

Step 2: Transfer the cost of asset sold from the debit of the asset cost
account to the credit of the asset disposal account

DR Disposal
CR Non-current asset (cost)

Step 3: Transfer the accumulated depreciation on the asset sold from the
credit of the provision for depreciation account to the debit of the
asset disposal account

DR Disposal
CR Provision for depreciation

Step 4: Record the amount received for the asset in the credit of the asset
disposal account

DR Bank or cash
CR Disposal

Step 5: The result balance on the disposal account (either pro7it or loss) is
then transferred to the statement of P/L at the end of the 7inancial
period.



It is, then, necessary to assess whether a pro7it or a loss has been made on the sale of the
asset. If the sale proceeds are more than the net book value of the asset, then a pro7it has
been made, and loss if vice versa.

If the balance on the asset disposal account is a debit, then a loss has been made; if the
balance on the asset disposal account is a credit, then a pro9it has been made.

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ACCOUNTING

PURCHASE OF NON-CURRENT ASSETS ON PART-EXCHANGE BASIS

Occasionally, a business may purchase new non-current asset and part exchange a non-
current asset that it wishes to dispose of, as part of the purchase price.

Record the transaction as:

Step 1: Open the old asset account with an opening balance

Step 2: Open the provision for depreciation account with an opening
balance for the old asset

Step 3: Transfer the cost of the old asset that is being part exchanged to the
disposal account

CR Non-current asset (cost) (original cost)
DR Disposal

Step 4: Transfer the part-exchange value of the old asset that is being of the
exchanged to the disposal account

DR Non-current asset (cost) (part-exchange value*)
CR Disposal

*part-exchange value = cost of new asset – amount settled with cheque/cash

Step 5: Transfer the accumulated depreciation on the old asset to the
disposal account

DR Provision for depreciation
CR Disposal

Step 6: Record the amount of the cheque/cash paid in the assets at cost
account and in the bank/cash account

DR Non-current asset (cost)
CR Bank or cash

Step 7: Transfer the balance on the disposal account (DR) to the P/L.

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 INTERNATIONAL ADVANCED LEVEL
ACCOUNTING

DISPOSAL OF NON-CURRENT ASSETS
On the sale of a 7ixed asset, the following entries are needed:

Step 1: Transfer the cost price of the asset sold to an assets disposal account

DR Disposal
CR Non-current asset (cost)

Step 2: Transfer the depreciation already charged to the assets disposal
account

DR Provision for depreciation
CR Non-current asset (cost)

Step 3: For the amount received on disposal

DR Bank or cash
CR Non-current asset (cost)

Step 4: Transfer the difference (i.e. the amount needed to balance the non-
current asset account) to the statement of pro7it and loss.

(i) if the disposal account shows a credit balance (i.e. if more
has been credited to the account than has been debited to it),
there is a pro@it on sale

DR Disposal
CR Statement of P/L

(ii) If the disposal account shows a debit balance, there is a loss
on sale

DR Statement of P/L
CR Disposal


In many cases, the disposal of an asset will mean that we have sold it. This will not always
be the case. For example, a vehicle may be given up exchanged against the purchases of a
new vehicle, and hence, the disposal value is the exchange value. Say, if a new vehicle
costing £10 000 was to be paid for by £6 000 in cash and an allowance of £4 000 for the
old vehicle, then the disposal value of the old vehicle if £4 000.