Non-current assets and depreciation
What the domain tests
You must classify capital and revenue expenditure, calculate depreciation under different methods, record disposals and part-exchange, and present non-current assets at net book value. Disposal account questions are common.
Core rules
Capital expenditure acquires or improves a non-current asset and is capitalised: purchase price, import duties, delivery, installation and testing, less trade discount. Routine repairs, maintenance, insurance and running costs are usually expensed over the relevant period; a component replacement or improvement may need different capitalization analysis under the applicable model.
Depreciation allocates the depreciable amount over useful life. Methods:
- Straight line: (cost − residual value) ÷ useful life, or a fixed percentage of cost.
- Reducing balance: a fixed percentage of the opening net book value each year.
- Units of production: depreciable amount × units used in the period ÷ total expected units.
On disposal, remove the asset cost and accumulated depreciation, record proceeds, and transfer the balance to profit and loss. Profit or loss on disposal = proceeds − net book value at disposal. In a simple part-exchange model, proceeds for the old asset are its agreed trade-in allowance. The new asset price equals that allowance plus any cash paid, before other supplied adjustments.
Worked example
A machine costs 5,000,000 FCFA, has a residual value of 500,000 and a five-year life. Straight-line depreciation is (5,000,000 − 500,000) ÷ 5 = 900,000 per year. After three years, accumulated depreciation is 2,700,000 and net book value is 2,300,000. It is sold for 2,000,000.
- Dr Disposal 5,000,000; Cr Machine 5,000,000.
- Dr Accumulated depreciation 2,700,000; Cr Disposal 2,700,000.
- Dr Bank 2,000,000; Cr Disposal 2,000,000.
- Disposal account shows a debit balance of 300,000, so Dr Profit and loss 300,000; Cr Disposal 300,000. This is a loss on disposal.
Traps
Profit on disposal is proceeds minus net book value, not minus cost. Installation and delivery are capitalised, but repairs are expensed. Reducing-balance depreciation is calculated on the opening net book value, not on cost every year. Accumulated depreciation has a credit balance and is not an asset. Do not forget depreciation for the current year before calculating the disposal profit or loss.