Accounting Summary Depreciation, Bad Debts, Bank Reconciliation

Summary Sheet – Accounting

DEPRECIATION & DISPOSAL OF NON-CURRENT ASSETS
1. Define Depreciation: An estimate of loss in value of a non-current asset over its expected working life.

2. What kind of expense is depreciation?
Ans: non-monetary expense (does not involve outflow of money)

3. Name 2 reasons / purpose of depreciation:  To comply with accounting principles
a) Matching: Spreads the cost of non-current asset over the years which benefit from the use of that
asset.
b) Prudence: Profit for the year will not be overstated. Non-current assets are shown at realistic
values.

4. Name and explain the causes of depreciation:
1) Physical Deterioration – wear and tear
2) Economic Reason – obsolete no longer meet the need of business (e.g. technology  out of trend)
3) Passage of Time – lease has fixed life of a number of years (e.g. house  freehold, leasehold)
4) Depletion – mines / wells worth of assets reduces as value is taken

5. Name 3 ways of calculating depreciation, characteristics of the method, and its formula.

Straight Line Method Reducing Balance Method Revaluation Method
Characteristics: Characteristics: Characteristics:
a) Fixed instalment method a) Same percentage rate is a) Assets are valued at the end
b) Applies the same amount of applied but calculated on of each financial year
depreciation / same different values each year b) The value is compared with
percentage each year b) Suitable for assets which the value at the end of
c) Suitable for assets which give provide greater benefit and previous financial year
equal amount of benefit lower maintenance cost in c) The amount by which the
each year throughout its the early years of its life value of assets has fallen is
working life the depreciation for the year
d) Suitable when difficult to
keep detailed records of a
certain type of non-current
asset
Formula: Formula: Formula:
cost of asset−residual value (Yr 1) cost x depreciation % rate
(1)
no of expected years of use (Yr 2) (cost − Yr 1) x Value at the beginning of the
(2) cost x depreciation % rate depreciation % rate Year – Value at the end of the
(Yr 3) (cost − Yr 1 − Yr 2) x Year
depreciation % rate




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, Example of asset that uses this Example of asset that uses this Example of asset that uses this
method: method: method:
i) Tables i) Computer i) Loose Tool (nuts)
ii) Chairs ii) Motor Vehicle ii) Packing Cases (box)
iii) Sofa iii) Machinery iii) Crockery (Plates)
iv) Computer iv) Cutleries
v) Bookshelf v) Bolts




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