accounting for business decisions b â 22207 AWS
ACCOUNTING FOR BUSINESS DECISIONS B – 22207 LECTURE 1 – NON-‐CURRENT ASSETS Describe non-‐current assets and how they are recorded, expensed and reported. Three primary activities for property, plant and equipment (main non-‐current assets): 1. 2. 3.
Acquisition of non-‐current assets Depreciation of non-‐current assets over their useful lives Disposal of non-‐current assets
LO1 -‐ NON-‐CURRENT ASSETS -
An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to arise A non-‐current asset is any tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale Assets are presented on the balance sheet Examples include: o Land o Buildings o Equipment
RECORDING NON-‐CURRENT ASSETS -
Non-‐current assets should be recorded at the cost of acquiring them (historic cost) All necessary costs incurred to get the asset delivered, installed and ready to use should be included Examples of expenditure to include the value of a non-‐current asset include: o Purchase price o Taxes and duties paid on the purchase o Delivery costs o Insurance costs during transit o Installation costs
EXAMPLE: R ECORDING N ON-‐CURRENT ASSETS Assume Tran Paper Supply buys a truck and pays the following: -
Purchase price: $60,000 Additional import duty: $3,600 Stamp duty: $400 GPS system: $1,000 Non-‐compulsory insurance: $1,400
EXPENSING NON-‐CURRENT ASSETS -
A non-‐current asset converts to an expense as It is used or consumed The expensing of non-‐current assets is called depreciation Depreciation is an application of a matching principle; because a non-‐current asset is used to generate revenues period after period, come of its cost should be expensed in, or matched to, those same periods
DEPRECIATION For accounting purposes, depreciation is a process of allocating an asset’s cost, not a method of determining an asset’s market value – depreciation is NOT about getting an asset to its market value E.g. you buy a pair of shoes for $200 expecting to wear them 200 times, expecting them to be worthless after this usage. After you wear them once, they may have a market value of $100, but depreciation would only be $1 if it were based on “usage”
RECORDING DEPRECIATION -
Depreciation expense is calculated at the end of an accounting period and recorded with an adjusting journal entry The general form of the entry to record depreciation is:
Dr Appreciation Expense (Expense increasing)
Cr Accumulated Depreciation (Contra-‐Asset increasing) -
Accumulated depreciation is a contra-‐asset account, meaning that it sits just below the asset, and its accumulating balance is subtracted from the asset account to yield the carrying amount (net book value) of the non-‐current asset – carrying amount gets lower over time
WHERE IS D EPRECIATION RECORDED? -
Depreciation expense is reported on the statement of comprehensive income (profit and loss statement) Accumulated depreciation is reported on the statement of financial position (balance sheet)
LO2 – DEPRECIATION Calculate and compare depreciation expense using straight-‐line, reducing balance and units-‐of-‐activity methods
CALCULATING DEPRECIATION EXPENSE -
When a company owns depreciable assets, it must calculate depreciation expense each period Doing so required the following information about the asset: o Cost à Historical cost of the asset being depreciated o Residual value/Salvage value à Market value of the asset at the end of its useful life o Useful life à Length of time a non-‐current asset is expected to be used
o
Depreciation method à The method used to calculate depreciation
DEPRECIATION METHODS We will focus on three methods to calculate depreciation -
The straight line method The reducing balance method The units of activity method
STRAIGHT LINE DEPRECIATION -
Straight line depreciation spreads depreciation evenly over the useful life of an asset The depreciation cost of the asset is divided by the useful life of an asset (in years) to yield the amount of depreciation expense per period
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝒆𝒙𝒑𝒆𝒏𝒔𝒆 =
𝑪𝒐𝒔𝒕 − 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆
Example
CARRYING AMOUNT
Carrying amount = Cost – Accumulated Depreciation Carrying amount is also called the Net Value or Book Value After this entry is recorded, what is the carrying amount of Tran’s truck?
Acquisition of non-‐current assets Depreciation of non-‐current assets over their useful lives Disposal of non-‐current assets
LO1 -‐ NON-‐CURRENT ASSETS -
An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to arise A non-‐current asset is any tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale Assets are presented on the balance sheet Examples include: o Land o Buildings o Equipment
RECORDING NON-‐CURRENT ASSETS -
Non-‐current assets should be recorded at the cost of acquiring them (historic cost) All necessary costs incurred to get the asset delivered, installed and ready to use should be included Examples of expenditure to include the value of a non-‐current asset include: o Purchase price o Taxes and duties paid on the purchase o Delivery costs o Insurance costs during transit o Installation costs
EXAMPLE: R ECORDING N ON-‐CURRENT ASSETS Assume Tran Paper Supply buys a truck and pays the following: -
Purchase price: $60,000 Additional import duty: $3,600 Stamp duty: $400 GPS system: $1,000 Non-‐compulsory insurance: $1,400
EXPENSING NON-‐CURRENT ASSETS -
A non-‐current asset converts to an expense as It is used or consumed The expensing of non-‐current assets is called depreciation Depreciation is an application of a matching principle; because a non-‐current asset is used to generate revenues period after period, come of its cost should be expensed in, or matched to, those same periods
DEPRECIATION For accounting purposes, depreciation is a process of allocating an asset’s cost, not a method of determining an asset’s market value – depreciation is NOT about getting an asset to its market value E.g. you buy a pair of shoes for $200 expecting to wear them 200 times, expecting them to be worthless after this usage. After you wear them once, they may have a market value of $100, but depreciation would only be $1 if it were based on “usage”
RECORDING DEPRECIATION -
Depreciation expense is calculated at the end of an accounting period and recorded with an adjusting journal entry The general form of the entry to record depreciation is:
Dr Appreciation Expense (Expense increasing)
Cr Accumulated Depreciation (Contra-‐Asset increasing) -
Accumulated depreciation is a contra-‐asset account, meaning that it sits just below the asset, and its accumulating balance is subtracted from the asset account to yield the carrying amount (net book value) of the non-‐current asset – carrying amount gets lower over time
WHERE IS D EPRECIATION RECORDED? -
Depreciation expense is reported on the statement of comprehensive income (profit and loss statement) Accumulated depreciation is reported on the statement of financial position (balance sheet)
LO2 – DEPRECIATION Calculate and compare depreciation expense using straight-‐line, reducing balance and units-‐of-‐activity methods
CALCULATING DEPRECIATION EXPENSE -
When a company owns depreciable assets, it must calculate depreciation expense each period Doing so required the following information about the asset: o Cost à Historical cost of the asset being depreciated o Residual value/Salvage value à Market value of the asset at the end of its useful life o Useful life à Length of time a non-‐current asset is expected to be used
o
Depreciation method à The method used to calculate depreciation
DEPRECIATION METHODS We will focus on three methods to calculate depreciation -
The straight line method The reducing balance method The units of activity method
STRAIGHT LINE DEPRECIATION -
Straight line depreciation spreads depreciation evenly over the useful life of an asset The depreciation cost of the asset is divided by the useful life of an asset (in years) to yield the amount of depreciation expense per period
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝒆𝒙𝒑𝒆𝒏𝒔𝒆 =
𝑪𝒐𝒔𝒕 − 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑽𝒂𝒍𝒖𝒆 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆
Example
CARRYING AMOUNT
Carrying amount = Cost – Accumulated Depreciation Carrying amount is also called the Net Value or Book Value After this entry is recorded, what is the carrying amount of Tran’s truck?
