Financial Accounting

2

3 Designed to give you knowledge and application of: Section D: Recording transactions and events D1. Sales and purchases D3. Inventory D4. Tangible non-current assets D5. Depreciation D7. Accruals & payments D8. Receivables & payments D9. Provisions & contingencies

4 Learning outcomes D4: Non current assets - Tangible  Define non-current asset. [1]  Recognise difference between current & non-current asset. [1]  Explain difference between capital & revenue items. [1]  Classify expenditure as capital or revenue expenditure. [1]  Prepare ledger entries to record the acquisition and disposal of non-current assets. [1]  Calculate & record profits or losses on disposal of non-current assets in the SOCI (income statement). [1]  Record the valuation of a non-current asset in ledger accounts and in the SOFP (balance sheet). [1]  Calculate the profit or loss on disposal of a revalued asset. [1]

5 Current assets are assets Realised (sold / consumed) in entity’s normal operating cycle Which are held for trading Such as cash / cash equivalent (unless restricted from being exchanged) Expected to realise within 12 months from balance sheet date Non-current asset (NCA)

6 The effect on profitability is indirectProfitability is directly affected Held for more than twelve monthsRealised within twelve months Examples Plant & machinery, building equipment etc. Examples Inventory, cash & bank balance, raw material etc. Used for investment and productive purposes Used for trading purposes Intended for use over a long period of timeIntended for sale or consumption Not realised in normal operating cycleRealised within the normal operating cycle of entity Non-current assets (NCA)Current assets (CA) Difference between…….

7 CA of one entity NCA of another entity CAN BE Computer is CA for dealer/seller NCA for buyers Dealer of computers Sells computers to people NCA continued…

8 Furniture & fixtures Copyrights Tangible NCA (TNCA) & Intangible NCA (INCA) TNCA = Tangible (Physical / touchable) + Non-current (other than current) assets INCA = intangible (Not physical / abstract) + Non-current (other than current) assets

9 Transactions Capital item in BS (SOFP) Revenue item in IS (SOCI) Capital expenditure Capital receipt Revenue expenditure Revenue receipt Capital & Revenue items  A regular business expenditure  Benefits for short term  Not a regular business expenditure  Benefits for long term

10 Revenue expenditure (RE)  Incurred to maintain existing capacity of asset  A kind of regular expenditure  Provides benefit of current nature i.e. benefit arising out of revenue expenses expires in the same accounting period Adding another floor to this building CE Painting this building RE Capital expenditure (CE)  Improves earning capacity of asset  Benefits are expected to last for more than one accounting period  Increases value of NCA Meaning

11 Revenue receipt (RR)  Regular receipt / income  Result of sale of entity’s merchandise & other revenue items such as rent received or commission received. Continued… Capital receipt (CR)  Income not earned out of regular operations of entity i.e. not realised by sale of merchandise of entity  When an item of capital expenditure is sold, the receipt is called a capital receipt  Decreases value of NCA For a bakery, selling an oven CR Selling cakes baked in an oven RR Refer to Test Yourself 4 on page 214

12 Elements of cost of asset Purchase price: price after deducting trade discounts and rebates and adding duties and non-refundable taxes Costs directly attributable to bringing the asset to its intended location and condition and includes Initial delivery and handling costs Installation costs Professional fees Dismantling cost: the cost incurred to remove the old asset Acquisition of NCA Proforma journal entry is as follows: Dr Non-current asset X Cr Cash / Payables / Other asset X Being non-current asset acquired

13 From the following invoice, compute the amount to be capitalised in the Plant account in the books of ICC Inc 53,290 Total (2,910)Less: Cash discount 5% 3,000 Add: Service charges for maintenance for the next 2 years 9,200 Add: Sales tax (Set off available) 6,000 Add: Import duty (set off not available) 8,320 Add: Transportation charges (320) Less: Trade discount 1% 30,000 15,0002Machinery $RateQty Invoice no-699 Address: Manchester, England Date: 01/01/20X6 Customer’s name: ICC Inc Champion Equipment Inc Continued… Example (Refer page 216)

14 A.53,290 B.56,200 C.44,000 D.53,200 Answer The correct option is C. - The amount to be capitalised is $44,000 because cost of a non- current asset includes transportation charges and import duty (as set-off is not available). However, it excludes trade discount, refundable taxes i.e. tax on which set off is available, service charges for maintenance and cash discount. So, the amount to be capitalised is calculated as follows: 53,2909,29044,000Total 6,000Add: Import duty 8,320Add: Transportation charges 29,680 (2,910)(320)Less: Discounts 3,000Sales tax set off available 9,20030,000Machinery Total $ Costs to be treated as revenue $ Costs which can be capitalised $ Continued…

15 Tip This means that if money is received on disposal of an asset, then two entries should be made. One, for transferring the asset to the asset disposal account, and another for recording of cash receipt. On disposal of an asset, if money is received or receivable then it is recorded in the asset disposal account DrCash / Trade receivable account X Cr Asset disposal account X Being cash received on disposal of asset Proforma entry is as follows: DrAsset disposal account X Cr Asset account X Being removal of the asset from the balance sheet Disposal of NCA

16 Revaluation of NCA in ledger accounts & in the SOFP Value the asset at its fair value Revaluation of asset means Upward Downward Revaluation Book value < Fair value Book value > Fair value Profit Loss Revaluation surplus account Loss recognised as expense SOFP SOCI Accounting for revaluations Amount for which an asset could be exchanged, between knowledgeable, willing parties in an arm’s length transaction

17 Journal entries for recording revaluation Upward revaluation DrAsset account X Cr Revaluation surplus account X Being profit on revaluation of asset transferred to revaluation surplus account Downward revaluation DrLoss on revaluation of asset X Cr Asset account X Being revaluation of asset Refer to Example on page 222

18 Revaluation surplus account Realisation of revaluation surplus account  Falls under the category of unrealised gains  This unrealised gain becomes a realised gain on disposal of the asset  Created to record an increase in the value of a non-current asset due to revaluation  This is an unrealised gain because it does not bring cash into the entity  Hence, there cannot be a distribution of profits out of the revaluation surplus Example Sun Enterprises purchased a building on 1 January 20X6 for $150,000. On 31 December 20X7 it revalued the building at $200,000. On 31 December 20X8 it sold the building for $280,000 in cash. What is the final gain on disposal of the asset? Draft the ledger accounts to support the answer. Continued… Revaluation Surplus

19 Answer Sun Enterprises Building account 200,000Total200,000 Total 200,000Asset disposal account (Note2) 31/12/20X8 200,000Balance b/d01/01/20X8 200,000Total200,000Total 200,000Balance c/f 31/12/20X7 50,000 Revaluation surplus (Note1) 31/12/20X7 150,000Balance b/d01/01/20X7 150,000Total150,000Total 150,000Balance c/f 31/12/20X6 150,000Purchase01/01/20X6 $ Date $ Example Continued… Continued…

20 Revaluation surplus account Asset disposal account 50,000Total 50,000Total 50,000 General reserve (note 5) 31/12/20X8 50,000 Balance b/d 01/01/20X8 50,000Total 50,000Total 50,000Balance c/d 31/12/20X7 50,000 Building 31/12/20X7 $ Date $ 280,000Total280,000Total 80,000 Profit on disposal of asset (Note 4) 31/12/20X8 280,000 Cash (Note 3)31/12/20X8200,000Building 31/12/20X8 $ Date $ Continued… Example Continued…

21 As you can see, the final gain of $80,000 is realised in the year of disposal. Notes: 1.Building has to be revalued upwards, so, we debit the asset account and credit the revaluation surplus account. 2.On disposal of asset, the entire book value of the asset is transferred to the asset disposal account. 3.On disposal of asset, any amount received is transferred to the asset disposal account. 4.The profit or loss on disposal of the asset is recognised in the SOCI (income statement). 5.On disposal of asset, the revaluation surplus of that asset becomes a realised gain, and hence it is transferred to retained earnings. Example Continued…

22 RECAP  Define a non-current asset ?  Recognise difference between current & non-current asset?  Explain difference between capital & revenue items?  Classify expenditure as capital or revenue expenditure?  Prepare ledger entries to record the acquisition and disposal of non-current assets?  Calculate & record profits or losses on disposal of non-current assets in the SOCI (income statement)?  Record the valuation of a non-current asset in ledger accounts and in the SOFP (balance sheet)?  Calculate the profit or loss on disposal of a revalued asset?