Accounting for Non-Current Assets and Depreciation
Accounting for Non-Current Assets and Depreciation
This domain tests capital versus revenue expenditure, depreciation methods and disposal accounting.
Core rules
- Capital expenditure acquires or improves a non-current asset; revenue expenditure maintains it.
- Cost includes purchase price, import duty, delivery, installation and testing; exclude training and routine repairs.
- Depreciation is systematic allocation of depreciable amount over useful life, not a cash fund.
- Straight-line depreciation = (cost − residual value) ÷ useful life.
- Reducing-balance depreciation = rate × carrying amount.
- On disposal, remove cost and accumulated depreciation, record proceeds and calculate gain or loss.
Worked example
A machine costs ₦1,000,000, has residual value ₦100,000 and a five-year life. Straight-line depreciation is (₦1,000,000 − ₦100,000) ÷ 5 = ₦180,000 per year. After two years, accumulated depreciation is ₦360,000 and carrying amount is ₦640,000. If sold for ₦600,000, the loss on disposal is ₦40,000. The sale proceeds are not revenue; only the gain or loss enters profit or loss.
Traps that cost marks
- Treating depreciation as cash set aside for replacement.
- Depreciating land that is not consumed.
- Recording sale proceeds as sales revenue.
- Forgetting to remove accumulated depreciation on disposal.
- Applying a reducing-balance rate as if it were a straight-line percentage of original cost.