Accounting for non-current assets

Accounting AS · Financial accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Capital expenditure is money spent on buying or improving non-current assets, including delivery and installation. It is shown in the statement of financial position. Revenue expenditure is the day-to-day running cost, such as repairs, and is an expense in the statement of profit or loss. Mixing them up gives the wrong profit and the wrong asset value.

Depreciation spreads the cost of a non-current asset over the years it is used, so that the cost is matched with the revenue it helps to earn. Assets lose value through wear and tear, obsolescence, passage of time and depletion.

When an asset is sold, its cost and its accumulated depreciation are moved to a disposal account to find the profit or loss.

Rules to remember

Straight-line: depreciation per year = (cost − residual value) ÷ useful life. The charge is the same every year.
Reducing balance: depreciation = rate × net book value at the start of the year. The charge falls each year.
Net book value = cost − accumulated depreciation.
Yearly charge: debit Depreciation expense, credit Provision for depreciation.
Disposal account: debit the cost; credit the accumulated depreciation and the sale proceeds (or part-exchange allowance). Proceeds above net book value give a profit; below give a loss.
Revaluation model: surplus = revalued amount − net book value. It is credited to the revaluation reserve, not to profit.
Revenue expenditure treated as capital: profit and non-current assets are both overstated. Capital treated as revenue: both are understated.

Common mistake

Applying the reducing balance percentage to the original cost every year. After the first year the rate is applied to the net book value brought forward.

Worked example

A machine cost $50,000. It is depreciated at 30% per annum by the reducing balance method. After two full years of depreciation it is sold for $26,000. What is the profit or loss on disposal?

Year 1 depreciation = 30% × $50,000 = $15,000, so net book value = $35,000.
Year 2 depreciation = 30% × $35,000 = $10,500, so net book value = $24,500.
Proceeds − net book value = $26,000 − $24,500 = $1,500.

Answer: Profit on disposal of $1,500.

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