BUS10250

Week 6 Lecture

Capital vs Revenue Expenditure

Chapter 24

Depreciation of
Non-Current Assets
Chapter 26 and Chapter 27
Capital expenditure

Capital expenditure is where a business spends

money on the purchase of non-current assets or in
the adding of value to an existing non-current
asset
Included any amounts should be spending on:
– Acquiring non-current assets
– Bring them into the business
– Legal costs of buy-in buildings
– Carriage inwards on machinery bought
– Any other cost needed to get a fixed asset ready for
use, eg., Initial installation fee. 2
Revenue expenditure

Revenue expenditure refers to those

expenses which do not add value to the
non-current assets of the business and are
incurred on a day-to-day basis

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Differences between capital
and revenue expenditure
Worked Exercise of
capital and revenue expenditure

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The nature of non-current assets

Non-current assets are items not

specifically bought for resale but to be
used in the production or distribution of
those goods normally sold by the
business.

They are durable goods that usually last

for several years, and are normally kept
by a business for more than one year.
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The nature of non-current assets

A non-current asset must also be

expected to generate revenue over a
number of future years, and be of a
material amount.

Non-current assets are referred to as

capital expenditure. All other costs are
revenue expenditure.

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The nature of non-current assets
‘An asset that:
(a) Is held by an enterprise for use in the
production or supply of goods and services,
for rental to others, or for administrative
purposes and may include items held for
the maintenance or repair of such assets;
(b) Has been acquired or constructed with the
intention of being used on a continuing
basis; and
(c) Is not intended for sale in the ordinary
course of business.’

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Classification of non-current assets
Investments – assets held on a long-term basis (i.e. for
more than one year).

Tangible – ‘assets that have physical substance and are

held for use in the production or supply of goods or
services, for rental to others, or for administrative
purposes on a continuing basis in the reporting entity’s
activities.’

Intangible – ‘non-financial non-current assets that do not

have physical substance but are identifiable and are
controlled by the entity through custody or legal rights.’ 9
Examples of non-current assets

Investments – subsidiaries, joint ventures,

shares, debentures held.

Tangible - land & buildings; plant & machinery;

motor vehicles; furniture, fixtures & fittings;
office equipment; loose tools.

Intangible - goodwill, patents, trade marks,

development expenditure.
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The valuation of non-current assets

In historical cost accounting non-current assets

are valued at their historical cost less the
aggregate/ accumulated depreciation from the
date of acquisition to the date of the statement
of financial position. This is known as the
written down value (WDV), net book value
(NBV), or net carrying amount (NCA).

Historical cost refers to the cost of getting the

asset at inception to working order.
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Historical cost
The historical cost of non-current assets can
include:

 legal expenses, extensions and

improvements, as in the case of buildings, but
not repairs and renewals;
delivery charges and installation expenses,
as in the case of plant and machinery.

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Historical cost
The historical cost of non-current assets must
exclude:
•the costs of any extended warranty,
maintenance agreement and replacement/spare
parts where these have been included in the
invoice price of, for example, machinery or
vehicles;

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The nature of depreciation
Depreciation is ‘the systematic allocation of the depreciable
amount of an asset over its useful life’ (IAS 16, IASB) =
International Accounting Standards Board

It reflects the amounts of the economic benefits of the

tangible non-current asset that have been consumed
during the period.

Wherein consumption includes the wearing out, using up or

other reduction in the useful economic life of the asset
whether arising from use, effluxion of time or obsolescence
through either changes in technology, price or demand for
the goods and services produced by the asset.
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Calculation of Depreciation :
Straight Line Method

Straight Line Method

Cost (C) – Residual Value (R.V.)

Depreciation = ---------------------------------------
Number of Years (N)

Example : Cost 10,000, use for 4 years and Residual Value 256

10,000 -256 9,744

Dep = -------------------- = ---------------- = 2,436
4 4 15
Calculation of Depreciation :
The Diminishing / Reducing Balance Method
The percentage rate of depreciation =
_________
100 - (ulRV  Cost x 100)
ul = estimated useful life
RV = residual value

The annual depreciation expense/charge to the income

statement account = Rate x WDV at the start of the year

This gives a decreasing annual amount of depreciation over

the assets useful life.

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In-Class Exercise of Depreciation Calculation

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 In-Class Exercise of Depreciation Calculation
Plant and machinery that was bought on the 1 January 20X1 at a cost of $1,000,
has an expected useful economic life of 3 years, and an estimated residual value
of $343. For Reducing Balance Method, dep rate is 30%.

Cost : RV : Life : Rate(%) :

St Line Method Reducing Balance Method

Year Cost Dep Bal Year Cost Dep Bal

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 EXAMPLE
COMPUTATION OF DEPRECIATION
Plant and machinery that was bought on the 1 January
20X1 at a cost of $1,000, has an expected useful
economic life of 3 years, and an estimated residual value
of $343. For Reducing Balance Method, dep rate is 30%.
1. Straight line method:
($1,000 - $343)  3 = $219 p.a.
2. Reducing balance method,
assuming deprecation rate used is 30%:
20X1: 30% x $1,000 = $300
20X2: 30% x ($1,000 - $300) = $210
20X3: 30% x ($1,000 – [$300 + $210]) = $147
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 THE LEDGER ENTRIES
FOR ANNUAL DEPRECIATION

Debit Depreciation expense account

Credit Provision for depreciation account

Debit Income statement/Profit & loss account

Credit Depreciation expense account

These are usually shortened to:

Debit Income statement/Profit & loss account
Credit Provision for depreciation account
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 LEDGER ENTRIES FOR DEPRECIATION

Plant and Machinery

20X1,
X2, X3 Bal b/d 1,000

Income statement extract for years X1, X2, X3

.
Expenses:
Depreciation 219
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 LEDGER ENTRIES FOR DEPRECIATION

Provision for Depreciation

20X1
Dec 31 P&L 219
20X2 20X2
Dec 31 Balance c/d 438 Dec 31 P&L 219
438 438
20X3 20X3
Dec 31 Balance c/d 657 Jan 1 Balance b/d 438
Dec 31 P&L 219
657 657
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 Extract of Statement of financial position
for years x1, x2 and x3

20X1 20X2 20X3

$ $ $
Non current assets:
Plant & machinery at cost 1,000 1,000 1,000
Less: accumulated depreciation 219 438 657
Written down value 781 562 343

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THE LEDGER ENTRIES FOR
DISPOSALS OF FIXED ASSETS
Profit on sale = Proceeds of sale > WDV
Loss on sale = Proceeds of sale < WDV

Ledger entries
1. Proceeds of sale:
Debit Cash /Bank (new asset a/c if exchange)
Credit Asset Disposal
2. Cost of the asset at disposal:
Debit Asset Disposal
Credit Fixed Asset
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3. Accumulated depreciation on disposal:
Debit Provision for Depreciation
Credit Asset Disposal

4. Profit on sale:
Debit Asset Disposal
Credit Profit & Loss , OR
Closing Entries
5. Loss on sale:
Debit Profit & Loss
Credit Asset Disposal

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 PROFIT ON DISPOSAL

The plant & machinery was sold on the

31 December 20X3 for $400.

WDV = $1,000 - $657 = $343

Profit on sale = $400 - $343 = $57

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LEDGER ENTRIES FOR DISPOSAL
Asset Disposal
20X3 20X3
Dec 31 Plant & Dec 31 Bank 400
machinery 1,000
20X3 “ “ Prov. for depn. 657

Dec 31 P&L 57
1,057 1,057

Income statement extract

Other income:
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Profit on sale of plant 57
LEDGER ENTRIES FOR DISPOSAL
Provision for depreciation
20X3 20X3
Dec 31 Asset disposal 657 Dec 31 Balance b/d 657

Plant & machinery

20X1 20X3
Jan 1 Bank 1,000 Dec 31 Asset disposal 1,000

1,000 1,000

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 PARTIAL YEAR DEPRECIATION
When a fixed asset is bought or sold part way through
an accounting year, the depreciation expense is
computed either:
1. on a strict time basis –
(a) in the year of acquisition, from the date of
purchase to the end of that accounting year, and
(b) in the year of disposal, from the start of the
accounting year to the date of sale; or

2. if the date of acquisition or disposal is not given -

(a) a full years charge in the year of purchase, and
(b) none in the year of sale. 29
 Worked Sample on Depreciation

Jan 01, Year 1 Dec 31, Year 1 Dec 31, Year 1

Buy Equipment Record Depreciation Record Depreciation

10,000 at year end ( r=60%) at year end ( r=60%)

Jan 01, Year 3

Case 1 :
Sold Equipment for 2,000
Case 2 :
Sold Equipment for 1,000
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Worked Sample on Depreciation

Double Entries for Depreciation :

(1) Purchases of the Non-Current Assets

(2) Record Yearly Depreciation

(3) When the Non-Current Asset is to be sold :

(a) Close the Non-Current Asset account
(b) Close the relevant Provision for Depreciation account
(ci) Sold at a profit
(cii) Sold at a loss

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Worked Sample on Depreciation
Yr 1 Jan 01 Purchase Equipment £10,000 on credit from ABC

Date ( Yr 1 ) Particulars Folio DR (£) CR (£)

Aug 16, 2011 Sales on credit to Shaw £375

Yr 1 Dec 31 Record Depreciation using 60% Reducing Balance

Date ( Yr 1 ) Particulars Folio DR (£) CR (£)

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 Worked Sample on Depreciation
Yr 2 Dec 31 Record Depreciation using 60% Reducing Balance
Date ( Yr 2 ) Particulars Folio DR (£) CR (£)

Aug 16, 2011 Sales on credit to Shaw £375

On Yr 3 Jan 01 The balances are as follows :
Equipment 10,000
Provision for Depreciation : Equipment 8,400
Depreciation : Equipment : NONE ( reset to zero)

Case 1 → Yr 3 Jan 01 Sell this Equipment for £2,000 cash

Case 2 → Yr 3 Jan 01 Sell this Equipment for £1,000 cash 33
Worked Sample on Depreciation
Step One : Close Equipment Account
Date ( Yr 3 ) Particulars Folio DR (£) CR (£)

Aug 16, 2011 Sales on credit to Shaw £375

Step Two : Close the Provision for Equipment Account

Date ( Yr 3 ) Particulars Folio DR (£) CR (£)

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Worked Sample on Depreciation
Step 3 : Case 1 → Sell this Equipment for £2,000 cash
Date ( Yr 3 ) Particulars Folio DR (£) CR (£)

Aug 16, 2011 Sales on credit to Shaw £375

Step 3 : Case 2 → Sell this Equipment for £1,000 cash

Date ( Yr 3 ) Particulars Folio DR (£) CR (£)

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END

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