Accounting For Depreciation And Disposal Of Non-current Assets
Visão Geral
A delivery van that cost $20 000 is not worth $20 000 forever. Every year of bumpy roads and engine hours wears it down, and one day it will be sold for scrap. Depreciation is how accounting recognises that quiet loss of value, spreading the cost of a long-life asset fairly across the years that benefit from using it. Without it, the accounts would show assets at their shiny purchase price long after they had aged, and profit would be flattered by ignoring a real cost of doing business.
In this lesson you will learn what depreciation is and why it must be recorded, then calculate it three ways: the straight-line method, the reducing-balance method, and the revaluation method. You will build the ledger accounts that hold it together, the asset account and the provision for depreciation account, and finally master the disposal account, where you work out the profit or loss made when an asset is finally sold. Every figure here is checkable, and getting the layout right is exactly what examiners reward.
Objetivos
- the meaning of depreciation.
- the need to account for depreciation.
- how to calculate depreciation using the straight-line, reducing balance and revaluation methods.
- the appropriate methods of depreciation that can be applied to different types of non-current assets.
- how to prepare journal entries and ledger accounts to record depreciation.
- how to prepare journal entries to record the purchase and sale of non-current assets.
- how to prepare ledger accounts to record the purchase and sale of non-current assets: non-current asset account, provision for depreciation account, and disposal of non-current asset account.
- how to calculate profit or loss on disposal of a non-current asset.
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- Which best describes depreciation? A. Cash set aside to replace an asset B. An estimate of the loss in value of a non-current asset over its working life C. The repair cost of a non-current asset D. The amount an asset is insured for Answer: B
- A machine cost $40 000 with an estimated residual value of $4 000 and a useful life of 6 years. What is the annual straight-line depreciation? A. $6 000 B. $6 667 C. $7 200 D. $4 000 Answer: A
- An asset costing $10 000 is depreciated at 20% per annum on the reducing balance. What is the depreciation charge in the SECOND year? A. $2 000 B. $1 600 C. $1 800 D. $4 000 Answer: B
- On disposal, an asset with a net book value of $3 000 is sold for $3 500. What is the result? A. Loss on disposal $500 B. Profit on disposal $500 C. Loss on disposal $3 000 D. Profit on disposal $3 500 Answer: B
- Which account always has a credit balance? A. The non-current asset account B. The disposal of non-current asset account C. The provision for depreciation account D. The purchases account Answer: C
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