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27 Cards in this Set
- Front
- Back
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Why is land treated differently?
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Because it is not depreciated
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What is capitalised in terms of land?
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All costs incurred to get land ready for its intended use
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What costs are involved with land?
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- purchase price
- title (search fees) - razing costs of building on the land - legals fees including transfer fees - real estate commissions |
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What costs are involved with buildings and equipment?
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- purchase price
- architectural fees - cost of permits - interest on loans - installation and commissioning costs - transportation costs - excavation and construction costs |
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What is capitalised in terms of buildings and equipment?
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All costs incurred to get the asset ready for use
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Which non-current assets are depreciated?
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All PPE, except Land
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What are the two parts to depreciation?
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1. Depreciation Expense
2. Accumulated Depreciation |
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Where does Depreciation Expense go?
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Income Statement
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What is Accumulated Depreciation?
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Contra Asset
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Where does Accumulated Depreciation go?
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On the asset side of the balance sheet but is deducted
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Depreciation
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A measure of that portion of the cost (less residual value) of a non-current asset which has been consumed during an accounting period
- matches cost to revenues |
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What four factors are considered when calculating depreciation?
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- the cost (or other value) of the asset
- the useful life of the asset (estimated); how long we expect to use it for - measured in years of units of production - the estimated residual value of the asset; how much it will be sold for/cost of removal - either positive (sale) or negative (destroy/remove) - the depreciation method |
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What 3 depreciation methods can you use?
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1. Straight Line Method
2. Accelerated Depreciation 3. Units of Production based Depreciation |
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Straight Line Method
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Allocates the amount to be depreciated evenly over the useful life of the asset
--> (Cost of asset - Residual Value)/Life of Asset |
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Accelerated Depreciation
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Results in depreciation expenses being higher in the early years of an asset's life than in later years
- the most common accelerated depreciation method if REDUCING-BALANCE/ DECLINING-BALANCE method which applies a fixed percentage rate of depreciation --> Formula: P = (1 - n x √R/C) x 100% P = depreciation percentage n = useful life (in years) R = residual value C = cost of asset |
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Units of Production based Depreciation
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Multiplies the depreciable amount by the relative output for each period
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Which method must a business use?
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Each business can choose which method
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What should the method do, according to the accounting standards?
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- Shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity
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What must companies disclose in their financial statement?
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- Method of depreciation employed
- depreciation rates applied OR useful lives of assets |
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What must a business do if they switch methods?
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In the year of transition, they need to express both methods in the notes
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Depreciation Expense
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Depreciation is the allocation of the cost of an asset to the years in which the benefits are expected to be received
- it is recorded every accounting period as an expense on the income statement - it is NOT an attempt to match the loss in the market value of the asset |
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Accumulated Depreciation
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- Cumulative Total of all depreciation charges
- contra asset - sits in the balance sheet under the asset it relates to |
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What is depreciation used for?
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To allocate the cost (minus resale) across accounting periods so as to calculate net profit each period
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Depreciation Expense is an _______
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estimate
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What does depreciation expense favour?
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Relevance over Reliability
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What are other transactions based on?
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Historical costs
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What do other transactions favour?
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Reliability over relevance
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