Welcome to chapter 10 of my POA teacher, which is my blog address for you who ended up here by chance haha lets focus on Non Current Asset or Fixed asset in this topic😊
💨What are Non -Current assets?
Non Current assets are assets that a business uses to assist them to generate income. It can be a machine/property/house/ office equipment or vehicles.
💨2 types of expenditure related to non current assets:
1. Capital Expenditure
Capital Expenditure refers to costs to purchase the non current assets. The non current asset costs include all expenses incurred to bring the fixed asset to a working condition such as import duties, insurance,freight & installation costs are included in the fixed asset costs. Capital expenditure provides benefits to the business for more than 1 financial period. It is recorded in the Balance sheet under the non current asset category.
2. Revenue Expenditure
Revenue expenditure refers to expenses that are used to operate/repair/maintain the fixed asset. Example would be petrol expenses for a non current asset of motor vehicle. The benefit of these exenditure are less than 1 financial period as a result these expenses are not recorded in the balance sheet, they are however recorded as an expenses in the income statement.
💨Double entry for purchasing a capital expenditure
Dr Non current asset $XX
Cr Bank/Trade creditor $XX
**Ps: Include all costs such as import duties, carriage inwards,installation costs that are incurred in bringing the fixed asset to working condition.
☝What is Depreciation?
Ans: Depreciation is the allocation of an asset original cost over the useful life of an asset.
When we depreciate assets, we are applying the matching accounting concept . Rmb that all expenses incurred have to be matched with the income generated within the same financial period? The same applies for depreciation as well --->
Income generated from Non- current Asset MATCH with Expenses generated from the same Non- current asset.
☝What are the types of depreciation?
1. Straight- line method
A Straight line method depreciate non current asset equally throughout its useful life. For E.g. a Machine bought for $10,000 has a useful life of 5 years, how much is its depreciation expenses per year? Ans: $2,000 per year ($10,000/5 years)
2. Reducing- balance Method
A reducing balance method calculates depreciation based on its Net Book Value(NBV) multiply by the depreciation rate. The NBV is calculated by the initial asset original cost less off the accumulated depreciation.
For e.g. Calculate the depreciation amount for a machine with $10,000 purchase price having an accumulated balance of $2,000 at a depreciation rate of 20%.
Depreciation amount = (Original cost - Accumulated depn) X depreciation rate
= (10,000 - 2,000) X 20%
= $1,600
👀Journal entry for depreciation: -
Dr Depreciation expenses - Machine $1,600
Cr Accumulated Depreciation - Machine $1,600
Next, I especially want to focus on the disposal of non current asset which is not difficult once you know the steps, you will laugh if it come out in your exams😂
💨4 steps Disposal of Non-current asset -
Step 1 - Create a sale of Non-current asset Account and transfer the original asset costs from non-current asset to the sale of Non-current asset Account.
Step 2 -Transfer the Non current asset's accumulated depreciation expenses thus far from the accumulate depreciation account to the sale of Non-current asset Account
*Depending on the question, if the question specify "no depreciation is charged in the year of disposal", we can safely extract the depreciation amount in the accumulated depn account, otherwise, we will need to pro-rate the depreciation expenses, for e.g. an asset is sold in March and the business finance year is from 1st Jan to 31 Dec, we will need to
---> Dr Depreciation Expenses $XX
Cr Accumulated Depn Exp $XX
(3/12 X yearly depn exp)
Step 3- Charge the proceed of the sales to the Sale of non current asset account, for e.g. cash proceed
---> Dr Cash at Bank $XX
Cr Sale of Non Current Asset $XX
** May not always be cash, payment could be in the form of an non current asset too.
Step 4 - Calculate the Gain/loss of the disposal of the non Current asset.
Not very difficult right haha, ok come lets attempt this question for a clearer understanding
☝Test your understanding
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