Topic 3 Edexcel A Level Accounting (IAL-AS) Depreciation .pptx

Depreciation, SLM & RBM, Revaluation Method

1. Depreciation of non-current assets Grade 11 Accounting System & Costing

2. Learning outcomes explain the causes of depreciation explain the reasons for charging depreciation calculate the depreciation charge using straight line, reducing balance and revaluation methods prepare ledger accounts for non-current assets and provisions for depreciation calculate and explain the effect on profit of different methods of depreciation and from a change in the method of depreciation account for the disposal of non-current assets understand the format of a schedule of non-current assets.

3. Depreciation Depreciation is the decrease/diminution in the value of NCA due to wear & tear, passage of time. Depreciation is non-cash item Depreciating a non-current asset does not enable a replacement to be purchased Depreciation is an estimate of the loss in value of an existing non-current asset Depreciating a non-current asset does not directly generate cash

4. Causes of depreciation Technical obsolescence Reduction in natural resources /Depletion Physical deterioration/Wear & tear Economic reasons Passage of time

5. Reasons for charging depreciation To spread the costs of assets over their estimated useful lives. To match the expenses of the year with that of the revenue (Matching Concept) To ensure that the profits & NCAs not overstated (Prudence concept)

6. Methods of calculating depreciation Straight-line/Fixed instalment Method Reducing balance method/ diminishing Balance method Revaluation method

7. Straight-line method Depreciation= Cost= Purchase price+ Delivery cost+ Installation charges+ Import duty Every year depreciation is the same amount Depreciation will be calculated on the cost of NCA This method will be applied on Furniture, fixtures & fittings  

8. Reducing balance/Diminishing balance method Depreciation is calculated on the NBV ie , ( Amount of depreciation will be reduced from year to year This method will be applied on Motor vehicles, Machinery, computer etc.  

9. Revaluation method Depreciation= This method will be applied on loose tools, goodwill etc.  

10. Straight-line VERSEs Reducing balance method Straight-line Depreciation on Cost of NCA Depreciation is fixed/constant amount Carrying value becomes zero Residual value takes into consideration It assumes that equal usage of assets over the estimated life Reducing Balance Depreciation on NBV/CV Depreciation reduces from year to year Carrying value never becomes zero Residual value does not take into consideration It assumes that the assets will be used more in early years

11. Advantages of straight-line Method It reflects equal usage of asset It takes in to account any residual value of asset It is relatively easy to use since the depreciation charge remains the same throughout its useful life Profit will be reduced by the same amount in every accounting period

12. Disadvantages As the time passes, assets become less efficient, maintenance cost will increase that leads to the distortion of true cost of using the assets Not suitable for assets whose value deteriorates more in early years . Such assets overstated in the financial statements in the early years. Estimated life of asset is only an estimation that reflected in the calculation of depreciation

13. Reducing balance Method- Advantages Depreciation expense will be higher in the early years, reducing over time More accurate expense Profits will be lower in the early years as the depreciation will be greater It does not take in to account any residual value as reducing balance method assumes as the assets has an infinite life

14. Disadvantages Residual value is not taken into consideration The carrying value never becomes zero. Accountant may need to write off depreciation when it becomes zero. Difficult to determine the rate of depreciation .

15. Non-Current Asset Account Date Details £ Date Details £   Balance b/d (cost) xxx   Disposal (cost) xxx   Bank (Additional purchase of NCA) (cost) xxx   Balance c/d (cost) xxx   Part Exchange – Disposal xxx         Trade payable (NCA on credit) (cost) xxx           xxx     xxx   Balance b/d xxx      

16. Provision for depreciation Account Date Details £ Date Details £   Disposal (Accumulated depreciation) xxx   Balance b/d xxx   Balance c/d xxx   Income statement/ SPL xxx     xxx     xxx         Balance b/d xxx Provision for Depreciation Account

17. Non-Current Asset Disposal Account Date Details £ Date Details £   NCA (disposal at cost) xxx   Provision for depreciation xxx   Income statement/SPL xxx   Bank (Selling Price) xxx         NCA – Part exchange           Income statement/SPL xxx     xxx     xxx

18. Schedule of NCA & Depreciation   NCA NCA NCA Cost at the beginning xxx xxx xxx Additions for the year xxx xxx xxx Disposal for the year (xxx) (xxx) (xxx) (a) Total NCA at cost xxx xxx xxx Depreciation       Provision for depreciation at the beginning xxx xxx xxx Depreciation on NCA disposal (xxx) (xxx) (xxx) Depreciation made during the year ended xxx xxx xxx (b) Total Accumulated depreciation xxx xxx xxx Carrying Value (NBV) at the end of the year xxx xxx xxx   NCA NCA NCA Cost at the beginning xxx xxx xxx Additions for the year xxx xxx xxx Disposal for the year (xxx) (xxx) (xxx) (a) Total NCA at cost xxx xxx xxx Depreciation       Provision for depreciation at the beginning xxx xxx xxx Depreciation on NCA disposal (xxx) (xxx) (xxx) Depreciation made during the year ended xxx xxx xxx (b) Total Accumulated depreciation xxx xxx xxx xxx xxx xxx