Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
39 Cards in this Set
- Front
- Back
|
Referring to the definitions, identify thecharacteristics common to both assets and expenses. |
Assets, in common with expenses, are necessary to help earnrevenue and generate profit. They both refer to the economic benefit that isbrought to the business. |
|
|
Explain the key differencebetween an asset and an expense. |
An asset is defined as future economic benefit, while anexpense is defined as the consumption of an economic benefit. That is, expensesrefer to economic benefit that has already been consumed, whereas assets referto economic benefits that are yet to be consumed. |
|
|
Identify thecharacteristics of a depreciable non-current asset. |
Depreciableassets have a finite life, and will be useful for a fixed period of time
|
|
|
Explain why it is notnecessary to calculate depreciation for assets such as land. |
Assets that have an infinite life should not bedepreciated, as they may be used, but are never ‘used up’ or consumed.
|
|
|
Referring to one accounting principle,explain why the entire cost of anon-current asset should not bereported as an expense. |
When a business purchases a non-current asset, it isclearly classified as such as the benefit will be provided for more than 12months. It cannot be reported as an expense as its entire benefit has not beenconsumed in the current Reporting Period. |
|
|
Explain why GST is excludedfrom the consideration of depreciation. |
GST isexcluded because it is not included in the cost of a non-current asset; itactually represents a reduction in the GST liability owed to the ATO
|
|
|
Define depreciation
|
the allocation of the cost of a non-current asset over its useful life |
|
|
Define depreciation expense
|
that part of the cost of a non-current asset that has been consumed in the current Reporting Period |
|
|
Referring to one accounting principle, explainthe purpose of depreciating a non-current asset
|
Because a non-current asset is not consumed entirely within the one ReportingPeriod, depreciation is an attempt to calculate how much of the asset’s valuehas been consumed in the current Reporting Period. |
|
|
Explain the effect of depreciation on afirm’s bank balance. |
No effect - doesn't involve the movement of cash
|
|
|
Explain the assumption that underliesthe straight-line method of depreciation in relation to how assets contributeto revenue. |
The straight-line method of depreciation assumes that non-current assetscontribute evenly to revenue. Given that it assumes that the value of thenon-current asset is consumed evenly over its life, the depreciation expense isthe same every year. |
|
|
State the formula for calculating depreciationusing the straight-line method
|
Depreciation expense ($ per annum) = HC – RV/Life |
|
|
Define Historical cost
|
the original purchase price of the non-currentasset
|
|
|
Define residual value
|
theestimated value of the non-current asset at the end of its useful life |
|
|
Define useful life |
the estimated period of time for which the non-currentasset will be used by the current entity to earn revenue. This is usuallymeasured in years
|
|
|
Explain why each non-current asset mustbe depreciated individually rather than as a total. |
Because each non-current depreciable asset is different in terms of itsuseful life and residual value, each must be depreciated individually. |
|
|
Referring to one accounting principle, explain why residual value is deductedfrom Historical Cost when calculating depreciation using the straight-linemethod. |
Residual value is deducted from the historical cost, as this is theamount that will not be consumed by the business, but by another entity. |
|
|
Show the General Journal entries torecord the balance day adjustment for depreciation expense. |
DR Depreciation of van CR Accumulated depreciation |
|
|
State one reason why the ledgeraccounts must name the asset being depreciated. |
Given that most businesses will depreciate more than one non-currentasset, it is imperative to identify precisely which asset is being depreciated. |
|
|
State the effect of depreciation on theaccounting equation
|
L - No effect OE - Decrease (Depreciation of van expense decreases net profit) |
|
|
Referring to one accounting principle, explain the difference betweendepreciation expense and accumulated depreciation. |
Whereas depreciation expense refers to the amount consumed in the currentReporting Period, accumulated depreciation refers to depreciation that hasaccumulated over the life of the asset so far (over a number of ReportingPeriods). |
|
|
State two reasons why the Depreciationexpense account must be closed at the end of the Reporting Period. |
-to transfer Depreciation Expense to the Profit and Loss Summaryaccount in order to calculate profit for the current Reporting Period - to reset the DepreciationExpense account to zero in preparation for the next Reporting Period |
|
|
State one reason why the Accumulated Depreciation account is balanced atthe end of the Reporting Period
|
AccumulatedDepreciation is a negative asset account and is an ongoing account; its balancewill be carried forward to the next Reporting Period. |
|
|
Referring to one accounting principle, explain why the original purchase priceof a non-current asset must be disclosed in the Balance Sheet. |
In order to keep the reports free from bias, the asset must always bereported initially at its Historical Cost (its original purchase price), asthis amount is verifiable by reference to a source document. |
|
|
1.
Define the term ‘carrying value’. |
the value of a non-current asset that is yet to be consumed/allocated as an expense, plus any residual value |
|
|
Referring to one qualitative characteristic, explain why non-current assets must bereported at their carrying value in the Balance Sheet. |
The carrying value is reported in the Balance Sheet as this isinformation that is useful for decision-making for the owner (Relevance). Forexample, the owner will be able to see if the asset is nearing the end of itsuseful life (low carrying value) and may need replacement. |
|
|
Show the formula for calculating therate of depreciation. |
Depreciation rate (% per annum) = Depreciation expense/Historical Cost x100 |
|
|
Show the formula for calculatingdepreciation expense using the rate of depreciation. |
Depreciation expense ($ per annum) = Depreciation rate x Historical Cost |
|
|
Define the term ‘cost’ as is relates tonon-current assets.
|
all costs incurred in order to bring the asset into a location and condition ready for use, which will provide a benefit for the life of the asset. |
|
|
Identify three costs that might be included inthe cost of a non-current asset
|
- thepurchase price/supplier’s price - deliverycosts - modificationcosts - installationcosts |
|
|
Explain why GST is excluded from thecost of a non-current asset.
|
GST is excluded because it actuallyrepresents a reduction in the GST liability owed to the ATO and does not becomepart of the cost of a non-current asset. |
|
|
Explain why yearly costsare excluded from the cost of a non-current asset. |
Yearly costs are excluded as their benefit will be consumedwithin a year, and so they do not fit the definition of the ‘cost’ of anon-current asset. |
|
|
Referring to one accounting principle, explain why it is not always accurate toreport depreciation expense per annum. |
If by the end of the Reporting Period, the firm has had control of theasset for less than a year, the depreciation figure will need to be applied ona pro-rata basis. |
|
|
Explain the process for calculatingdepreciation of an asset when the firm has had control of the asset for lessthan a year. |
After calculating the depreciation expense per annum, multiply thisnumber by the number of months (that the business has had control of the asset)out of 12. |
|
|
Explain how depreciation can underminethe Reliability of accounting reports. |
When calculating depreciation, the residual value and the useful life ofthe non-current asset are estimates, and are therefore not based on verifiableevidence. This makes the accounting reports not free from bias. |
|
|
Explain how depreciation ensuresrelevance in the:Income Statement |
depreciation ensures that the Income Statementincludes all information that is useful for decision-making about profit, byshowing the consumption of non-current assets in the current Reporting Period
|
|
|
Explain how depreciation ensures relevance in the Balance Sheet
|
Byshowing acumulated depreciation in the Balance Sheet, it ensures that assetsare shown at their carrying value, which is vital for decision-making abouttheir replacement. |
|
|
Explain why depreciation expense is considered relevant
|
Depreciation represents information which is useful in decision - making and shows the amount of a non - current asset that has been consumed during a period. This is relevant to decision makers as they assess the performance of the businsess
|
|
|
Explain why depreciation expense may not be considered reliable
|
Depreciation is based on estimates such as useful life and residual value and therefore cannot be verified by source documents. It is therefore based on opinion and bias
|
