Accounting for Non-Current Assets: Acquisition, Depreciation, Disposal and the Asset Register
This domain tests capital versus revenue expenditure, the depreciation methods, the disposal account and the asset register. Questions usually combine a depreciation calculation with a disposal, and often ask for the effect on the profit and loss account and the balance sheet.
Capital and revenue expenditure
Capital expenditure acquires or improves a non-current asset and is capitalised: purchase price, carriage inwards on the asset, installation and testing, legal fees, site preparation, less trade discount. Revenue expenditure maintains the asset and is charged to the profit and loss account as incurred: repairs, servicing, insurance, fuel, operator wages. Depreciation is not a cash payment; it is the systematic allocation of the depreciable amount (cost less residual value) over the useful life, applying the matching concept.
Methods
- Straight line: (cost − residual value) ÷ useful life, or a fixed percentage of cost; equal charge each year.
- Reducing balance: a fixed percentage of net book value, giving a larger charge early and a smaller one later.
- Units of production: depreciable amount × (units used this period ÷ total expected units).
Entry each year: Dr depreciation expense, Cr accumulated depreciation. Accumulated depreciation is a contra-asset, not a liability, and is deducted from cost to give net book value.
Disposal
Depreciation for the current year up to the disposal date is charged first. Then transfer the cost to a disposal account (Dr), transfer the accumulated depreciation on that asset (Dr), and record the proceeds (Cr). A credit balance is a profit on disposal, transferred to the profit and loss account as income; a debit balance is a loss, charged as an expense.
Asset register
Records for each asset: description, serial number, location, supplier, purchase date, cost, depreciation method and rate, annual charge, accumulated depreciation, net book value and disposal details. It supports the balance sheet figures and helps control, insure and verify assets.
Worked example
A machine costs 1,200,000 FCFA, has a residual value of 200,000 and a five-year life; straight line is used. Annual depreciation = (1,200,000 − 200,000) ÷ 5 = 200,000. After three years, accumulated depreciation is 600,000 and net book value 600,000. It is sold for 500,000. Disposal account: Dr cost 1,200,000; Dr accumulated depreciation 600,000; Cr bank 500,000. The balance is 100,000 debit, a loss charged to the profit and loss account, because book value at sale was 600,000 but only 500,000 was received.
Traps
- Adding a repair or repainting cost to the asset account.
- Depreciating land, which normally has an indefinite life.
- Charging a loss on disposal to sales or leaving it in the asset account.
- Forgetting to remove the accumulated depreciation of the disposed asset.
- Applying a reducing balance rate to cost instead of net book value.