Accounting for Non-Current Assets

Business Accounting
Capital expenditure vs revenue expenditure
Capital expenditure is expenditure which results in the acquisition of non-current
assets, or an improvement in their earning capacity.
a) Capital expenditure is not charged as an expense in the income statement,
although a depreciation charge will usually be made to write off the capital
expenditure gradually over time. Depreciation charges are expenses in the income
statement.
b) Capital expenditure on non-current assets results in the appearance of a non-
current asset in the statement of financial position of the business.

Revenue expenditure is expenditure which is incurred for either of the following

reasons:
a) For the purpose of the trade of the business. This includes expenditure classified
as selling and distribution expenses, administration expenses and finance charges.
b) To maintain the existing earning capacity of non-current assets.

Research & Development Cost IAS 38

Business Accounting
Non-current assets - definition
Non-current assets are distinguished from current assets by the following
characteristics:
• Long-term in nature
• Not normally acquired for resale
• Could be tangible or intangible
• Used to generate income directly or indirectly for a business
• Not normally liquid assets (i.e. not easily and quickly converted into
cash without a significant loss in value)

Business Accounting
Depreciation – explained by IAS 16

Disposal of Assets

Business Accounting
Methods of Depreciation
Two methods of depreciation are specified in your FFA syllabus:
1. the straight line method
2. the reducing balance method

The straight line method

This is the most commonly used method of all. The total depreciable amount is charged in equal
instalments to each accounting period over the expected useful life of the asset.

The reducing balance method

The reducing balance method of depreciation calculates the annual depreciation charge as a fixed
percentage of the carrying value of the asset, as at the end of the previous accounting period.

Example:
A machine bought for a business cost $17,000. It is expected to last for five years and
then be sold for scrap for $2,000.

Required
Work out the depreciation to be charged each year under:
(a) The straight line method
(b) The reducing balance method (using a rate of 35%)

Business Accounting
Depreciation Accounting
Example:
A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an
estimated residual value of $3,000 and a life of eight years. The machine was sold for
$18,600 on 31 December 20X4, the last day of the accounting year of the business. To make
the sale, the business had to incur dismantling costs and costs of transporting the machine
to the buyer's premises. These amounted to $1,200.

The business uses the straight line method of depreciation. What was the profit or loss on
disposal of the machine?

Answer: Loss on Disposal of $3,600

Business Accounting
Accruals & Prepayments

Business Accounting
Accruals and Prepayments
Accrued expenditure
An accrual arises where expenses of the business, relating to the year, have not been paid by
the year end.

In this case, it is necessary to record the extra expense relevant to the year and create a
corresponding statement of financial position liability (called an accrual)

Debit Expense account XX

Credit Accrual XX

Prepaid expenditure

A prepayment arises where some of the following year’s expenses have been paid in the
current year.

In this case, it is necessary to remove that part of the expense which is not relevant to this
year and create a corresponding statement of financial position asset (called a prepayment)

Debit Prepayment XX
Credit Expense account XX

Business Accounting