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Present economic resource
Held for use in
On a
Not for sale in
Classification of non-current (fixed) assets
T. non-current (fixed) assets
I. non-current (fixed) assets
Investments held long term
Intangible No substance.
P..
T..
D.
G..
Valuation of non-current (fixed) assets initially at cost
Subsequently choose either
at C. less A.D....
Also called N.. B. V.. (NBV)
or depreciated cost
Financial Accounting
Asset is recorded at
Usually applied to ..
Revaluation is a .. for the company.
If used, revaluations must be updated .
What is cost?
What is depreciation?
P. of an asset plus the .. it for use
(legal costs of acquisition and installation and commissioning costs).
Improvement expenditure may result in:
. the assets annual output capacity;
its economic life;
. associated running costs;
. the quality of its output).
Costs incurred to improve on the assets original condition:
These costs should be added to the original cost of the asset and depreciated over the remainder
of its useful life.
.......
Financial Accounting
DEPRECIATION
There are many views as to the nature of depreciation.
Accounting takes a limited view:
Non-current (fixed) assets are . in providing goods and
services over time.
The purpose of accounting depreciation is to of a non-current
(fixed) asset over its expected useful life.
Depreciation is a method of cost.
It achieves a .. costs against the related revenues.
In historical cost (traditional) accounting:
The net book value (NBV) of a non-current (fixed) asset is the result of a calculation:
Original cost minus A.. D
It is not intended to represent the assets .
Year Assets minus Liabilities equal Ownership
interest
Each year that a non-current (fixed) asset is in use, a portion of its cost is deducted from the
value shown in the statement of financial position (balance sheet). That portion of cost is
matched against the revenues of that year. This gives the
.
(income statement/profit and loss account).
Financial Accounting
Calculation of depreciation requires three items of information:
the .of the non-current (fixed) asset;
the estimated and
the estimated . (the value remaining at the end of the useful life).
The . depreciation of the non-current (fixed) asset is equal to the .of the
non-current (fixed) asset minus the estimated ...
(a) ... method
(b) method
Those who believe that a non-current (fixed) asset is usedover time
apply a method of calculation called straight-line depreciation.
The formula is:
____________________________________
Example
A non-current (fixed) asset has a cost of £1,000 and an expected life of 5 years. The expected
residual value is nil. The calculation of the annual depreciation charge is:
_________________________ = £per annum
The depreciation rate is sometimes expressed as a ..
In this case, the company would state its depreciation policy as given below:
Accounting policy:
Depreciation is charged on a straight-line basis at . per
annum.
Financial Accounting
The phrase straight line is used because a graph of of the
asset at the end of each year produces a straight line.
Pattern of depreciation and net book value over the life of an asset
End of year Depreciation of
the year
Total
depreciation
Net book value
of the asset
(b) (c) (£1,000 c)
Straight-line method of depreciation: graph of net book value over
years 1 to 5
Those who believe that a non-current (fixed) asset depreciates in the
.years of its life would calculate the depreciation using the formula:
..
What is the fixed percentage?
Financial Accounting
The rate of depreciation to be applied under the reducing balance method of depreciation may
be calculated by the formula:
rate = 1 nR
C × 100%
where n = .
R = .
C = .
For the asset costing £1,000 with a 5-year life and small residual value (say £30):
n = 5 years
C = £1,000
R = £30 (The residual value must be of reasonable magnitude. Using an amount of nil
for the residual value would result in a rate of 100%).
rate = 530
11,000 100% = approx 50%
Calculation of reducing-balance depreciation
Year Net book value
at start of year
Annual
depreciation
Net book value
at end of year
The steep slope at the beginning shows that the net book value declines rapidly in the early part
of the assets life and then less steeply towards the end when most of the benefit of the asset has
been used up.
Financial Accounting
Reducing-balance method of depreciation: graph of net book value over
years 1 to 5
Fee income, £120,000; pay wages and other costs, £58,000; depreciation calculated as £10,000
How much may the owner take in drawings?
Cash available is £..
But if that is taken for personal use, there is
Take cash of £.. leave..
Problem business may spend .on other aspects of business, such as:
Financial Accounting
On 1 January Year 2, Electrical Instruments purchased a three-year lease of a shop for £60,000.
The accounts over the next three years would include the following items related to the lease:
Income statement
(profit and loss account)
Statement of financial position
(balance sheet
The Removals Company was set up on 1 January Year 2, purchased a van for £60,000 and
started to trade.
The manager estimates that:
the van will be used for 3 years and
at the end of that time, it will have a residual value of £6,000 (second hand or scrap value).
Net cost of the van (............... ..............) = £.................
Net cost has to be .....................over................years.
Financial Accounting
Statement of financial position (balance sheet) at 31 December Year 2
Income statement (profit and loss account) for Year to 31 Dec Year 2
Financial Accounting
Spreadsheet analysis of transactions of The Removals Company, Year 2
Assets Ownership interest
Transaction or event Van at
cost
Accumulated
depreciation
of van
Cash OI
increase
Profit =
revenue
minus
expenses
It is assumed that for Year 3, the amounts of cash collected from customers and the amounts
paid in cash for running costs are the same as for Year 2.
Financial Accounting
Spreadsheet analysis of transactions of The Removals Company, Year 3
Assets Ownership interest
Transaction or event Van at
cost
Accumulated
depreciation
of van
Cash OI at
start of
year
Profit =
revenue
minus
expenses
Statement of financial position (balance sheet) at 31 December
Financial Accounting
Income statement (profit and loss account) for Year to 31 December
Statement of financial position (balance sheet)
Notes Year 6
£m
1 1,219
Notes to the statement of financial position (balance sheet)
In the notes to the statement of financial position (balance sheet), there is considerably more
information:
Land and
buildings
Plant and
equipment
Vehicles Total
Financial Accounting
What can we learn about the company from this information?
1. How up to date are the non-current (fixed) assets of the organisation?
(i) Average useful life of plant and equipment:
Cost at year end
.
Taking 31 December Year 7 £ m. = years
£ m.
(ii) Proportion of cost that has been depreciated:
............................................................
Cost at the year end
£ m = .
£ ........... m:
(iii) Average age of plant and equipment
Average useful life proportion of cost depreciated.
..................... ................................ = .................................. years old
Financial Accounting
2. How efficiently are assets being used? (Fixed asset turnover)
We are told that turnover for Year 7 is £754.6 million (Year 6 £611.3 million)
Turnover (Sales)
£754.6 million = ................................
million.
OR £......................... sales are generated by each £1 of
.........................................................................
Compare this with the following:
(i) ..........................................................................................................
(ii) .........................................................................................................
Analysis of transactions for The Removals Company, Year 2
Ledger accounts required to record transactions of Year 2
L1 Ownership interest
Date Particulars Page Debit Credit Balance
Financial Accounting
L2 Cash
Date Particulars Page Debit Credit Balance
L3 Van at cost
Date Particulars Page Debit Credit Balance
L4 Accumulated depreciation of van
Date Particulars Page Debit Credit Balance
L5 Sales
Date Particulars Page Debit Credit Balance
L6 Running costs
Date Particulars Page Debit Credit Balance
L7 Depreciation of the year
Date Particulars Page Debit Credit Balance
Financial Accounting
Trial balance at the end of Year 2 for The Removals Company
Ledger account title
L5 Sales
Date Particulars Page Debit Credit Balance
L6 Running costs
Date Particulars Page Debit Credit Balance
L7 Depreciation of the year
Date Particulars Page Debit Credit Balance
L8 Profit and loss account
Date Particulars Page Debit Credit Balance
Financial Accounting
L1 Ownership interest
Date Particulars Page Debit Credit Balance
Years 3 and 4
L3 Van at cost
Date Particulars Page Debit Credit Balance
L4 Accumulated depreciation
Date Particulars Page Debit Credit Balance
L7 Depreciation of the year
Date Particulars Page Debit Credit Balance
L7 Depreciation of the year
Date Particulars Page Debit Credit Balance
Financial Accounting
Disposal of the asset
Date Transaction or event Amount Dr Cr
L3 Van at cost
Date Particulars Page Debit Credit Balance
L4 Accumulated depreciation
Date Particulars Page Debit Credit Balance
L9 Non-current (fixed) asset disposal account
Date Particulars Page Debit Credit Balance
Financial Accounting
Sale for an amount greater than the net book value
L9 Non-current (fixed) asset disposal account
Date Particulars Page Debit Credit Balance
L8 Profit and loss account
Date Particulars Page Debit Credit Balance
