Accounting For Depreciation

9
Accounting for Non-current Assets and

Depreciation
Learning Outcomes
After studying this chapter, you should be able to:

Explain the concept of revenue expenditure and capital
expenditure
Explain the concept and causes of depreciation
Explain the concepts of original cost, scrap or residual
value, useful life, accumulated depreciation, and net
asset value
Calculate and record depreciation expense by the
straight-line, reducing balance, and units of production
methods
Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2018 1–3
9.0 Introduction
 All businesses need not only current, but also non-

current assets (fixed assets), to operate.
 The reduction in the value of non-current assets,
i.e. the portion of the cost that is used up, is called
depreciation. It must be taken into account when
we prepare our financial statements.
 What is the nature of non-current assets and why
are they depreciated in the accounts?
 How is depreciation recorded in the books of
accounts and presented in the financial statements.
9.1 Revenue Expenditure and
Capital Expenditure
Business expenditure:
Revenue expenditure
– Expenditure on items that contribute to the revenue-
earning capacities of a business and is expensed off
immediately to match the revenues of the same
accounting period.
– At the end of an accounting period, it is deducted
from revenue to determine the profit.
– Examples of such expenditure include salary, wages,
rental, utility bills and advertising expenses.
– Revenue items are dealt with in the Statement of
Profit of Loss and Other Comprehensive Income.
9.1 Revenue Expenditure and
Capital Expenditure (cont.)
 Capital expenditure
– Expenditure on items that contribute to the revenue-
earning capacities of a business, but the items are
expected to contribute for more than one accounting
period.
– It is the amount paid to acquire or extend the useful
lives of non-current assets or to reduce non-current
liabilities.
– Capital items are dealt with in the Statement of
Financial Position.

9.2 Basic Ideas of Depreciation
Three main accounting concepts form the basis for

calculating and recording depreciation:
The going concern concept
The historical cost concept
The matching concept

9.2 Basic Ideas of Depreciation
(cont.)
Causes of depreciation:

9.3 Methods of Calculating
Depreciation
Consideration must be given to the following three

factors to determine the rate of depreciation:
The cost of the non-current asset (the total acquisition
cost incurred in bringing the asset to its current location
and condition)
The useful economic life (the expected number of years
the asset can be used to generate profit)
The estimated residual value/scrap value/disposal
value at the end of the asset’s useful life

Depreciation (cont.)
The most common depreciation methods are:
Straight-line method
– Based on the cost of the non-current asset less the
residual value, spread evenly over the useful economic
life of the asset. The amount of depreciation charged in
each period is the same.
Reducing balance method
– Based on the carrying value of the asset at the beginning
of the financial period. The amount of depreciation
charged every period gradually decreases.
Units of production method

The most common depreciation methods are:
Units of production method
– The cost of the non-current asset is spread out over
its useful life based on its use. Therefore, the useful
economic life of the fixed asset is estimated based on
the total production units which the non-current asset
can operate.

9.4 Bases of Providing
Depreciation
There are two main bases for calculating depreciation

provisions for assets bought or sold during an accounting
period:

 End-of-year basis (Yearly basis)
– We ignore the dates during the year when the assets
were bought or sold. We merely calculate a full period’s
depreciation on the assets in use at the end of the
period.
– Assets sold during the accounting period will have had
no provision for depreciation irrespective of how many
months they were in use.
– Assets bought during the period will have a full period of
depreciation calculated even though they may not have
been used throughout the whole period.

 Month-to-month basis (Monthly basis)
– The provision for depreciation is made on the basis of
“one month’s ownership, one month’s provision”.
– A fraction of a month is usually ignored. However,
some may consider it as one month’s ownership
if they have possessed the asset for more than or equal
to 15 days.

9.5 Books of Accounts:
Recording Depreciation
 In recording depreciation in the books of
accounts, two types of accounts are
maintained:
– Depreciation expense account
– Accumulated depreciation account

9.6 Dealing with More Than One
Type of Non-Current Asset
 Where there is more than one type of non-current
asset, say three types (e.g. plant and machinery,
fixtures and fittings, and motor vehicles), then three
sets of non-current asset accounts, depreciation
accounts and allowance for depreciation accounts
must be maintained.
 Samples of the financial statements can be seen as
follows:

9.6 Dealing with More Than One
Type of Non-Current Asset (cont.)


Accounting For Depreciation

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9

Accounting for Non-current Assets and

After studying this chapter, you should be able to:

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 All businesses need not only current, but also non-

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Three main accounting concepts form the basis for

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Consideration must be given to the following three

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

There are two main bases for calculating depreciation

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

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