Depreciation of Non-Current Assets

• Non-current assets are those purchased for long-term use in the business. They will be recorded, at their cost, on the statement of financial position.
• In the ledger accounts, non-current assets will be recorded on the debit side of the appropriate account. A business will normally keep a separate ledger account for each type of non-current asset.
• According to the accruals basis of accounting, expenditure on a non-current asset should be matched against the income generated by the asset throughout its useful life in the business. This is done by calculating depreciation charges on the asset, which effectively reflects the consumption or ‘wearing out’ of the asset through its use.
• There are two main methods for calculating depreciation charges, straight line and diminishing balance.
• Regardless of the method used for its calculation, the depreciation charges are always recorded in the same way.Dr Depreciation charge (this account is shown on the statement of profit or loss).

  Cr Accumulated depreciation (this account is shown on the statement of financial position)
• The straight line basis will charge the same amount of depreciation to the statement of profit or loss each year.
• The annual depreciation charge is calculated as:

  cost - residual value / useful economic life
• An alternative way of calculating the depreciation charge on the straight line basis is to apply a pre-determined fixed % to (cost - residual value) each year.
• The diminishing balance method will charge higher amounts of depreciation to the statement of profit or loss in the early years of owning an asset, diminishing steadily in later years. This may be considered a more appropriate way of matching expenditure to the income it generates.
• The accumulated depreciation reduces the value of the asset over it useful life. If you remove the non-current asset then you must remove the associated accumulated depreciation as well.
• DISPOSING OF AN ASSET STEP 1

  Create a disposals account. This is a temporary account which we are going to use to calculate a gain or loss on disposal of the asset.Transfer the cost and accumulated depreciation on the asset into this account by means of double entry.Dr DisposalsCr Non-current asset - costDr  Accumulated depreciationCr DisposalsThe asset has now been removed from the ledger accounts into the disposals account. 
• DISPOSING OF AN ASSET STEP 2

  Record the receipt of disposal proceeds.Dr BankCr Disposals 
• DISPOSING OF AN ASSET STEP 3

  The balancing figure on the disposals account, which represents the gain or loss on disposal, is transferred to the statement of profit or loss.If a balancing figure is needed on the debit side of the disposals account:

  • Dr Disposals
  • Cr Statement of profit or loss
  • this represents a gain on disposal.

  If a balancing figure is needed on the credit side of the disposals account:

  • Dr Statement of profit or loss
  • Cr Disposals
  • this represents a loss on disposal.