Reducing Balance Depreciation As time passes, the economic benefits of non-current assets will be used up or consumed by the business.

Sundry Creditors Non-current assets are expensive. Buying them on credit is like having a short term interest free loan. But they are not stock so non-current assets are not recorded in the Purchases Journal. Nor are they cash. So record them in the General Journal.

General Journal Office Furniture GST Clearing Sundry Creditors – ABC Furniture Credit purchase of Office Furniture (Inv )

Payment The payment will be cash so record it in the Cash Payments Journal. Note: the payment includes GST but the GST was recorded when the sale was made so don’t record it again. DateDetailsChqCreditorDiscount Revenue WagesSundriesGSTBank 2-FebSundry Creditor – ABC Furniture

Revision of Straight Line Method of Depreciation Reminder that GST is excluded from the calculation of Depreciation as it does not effect the ability of the Non Current Asset to make a profit.

Nic Farley’s Cricket Coaching Balance Sheet as at 31 st June 2015 Non Current Assets Computer10,000 Less Accumulated Depreciation 1,600 of Computer

Historical Cost The value of the non current asset does not change in the Balance Sheet.

Depreciation Expense Straight line method And Depreciation Expense is calculated on Historical Cost.

Straight line depreciation It is assumed that the amount of the non-current asset used up each year is the same and therefore so is the amount of depreciation.

Reducing Value Method

Nic Farley’s Cricket Coaching Balance Sheet as at 31 st June 2015 Non Current Assets Computer10,000 Less Accumulated Depreciation 2,752 7,248 of Computer

Historical Cost Reducing Value The value of the non current asset STILL does not change in the Balance Sheet.

Depreciation Expense Reducing method The Depreciation Expense is calculated on Carrying Value.

Nic Farley’s Cricket Coaching Balance Sheet as at 31 st June 2015 Non Current Assets Computer10,000 Less Accumulated Depreciation 2,752 7,248 of Computer

Reducing balance depreciation This method assumes that the amount of the non-current asset used up each year decreases and therefore so is the amount of depreciation.

Reducing balance This method is calculated using a rate e.g %. So the Historical cost X the rate. $10,000 x 27.52% = $2,752 But it is not $2,752 every year because the rate is applied to the Carrying Value in the second year – not the Historical cost.

Reducing balance over time Historical cost10,000 Less Accumulated Depreciation Nil Carrying Value10,000 Depreciation Expense2,752

Reducing balance over time Historical cost10,000 Less Accumulated Depreciation Nil2,752 Carrying Value10,0007,248 Depreciation Expense2,7521,995

Reducing balance over time Historical cost10,000 Less Accumulated Depreciation Nil2,7524,747 Carrying Value10,0007,2485,253 Depreciation Expense2,7521,9951,446

Reducing balance over time Historical cost10,000 Less Accumulated Depreciation Nil2,7524,7476,193 Carrying Value10,0007,2485,2533,807 Depreciation Expense2,7521,9951,4461,048

Reducing balance over time Historical cost10,000 Less Accumulated Depreciation Nil2,7524,7476,1937,241 Carrying Value10,0007,2485,2533,8072,759 Depreciation Expense2,7521,9951,4461,048759

Comparing Straight-line to Reducing Historical Cost10000Residual Value2000 Useful life5 Straight line $1600 pa Historical Cost10000 less Accum Dep’n Carrying Value % Historical Cost10000 less Accum Dep’n Carrying Value Notice: Reducing Balance Depreciation is higher at the start but both are the same at the same at the end $2,000

The Debits and Credits Are exactly the same for both Depreciation methods. Depreciation (Expense) 1 AprilAccumulated Depreciation AprilProfit & Loss Summary 2752 Accumulated Depreciation 30 AprilBalance27521 AprilDepreciation AprilBalance2752

The effect on the Financial Reports Is the same as for Straight line; –Depreciation still reduces profit & Owner’s Equity –Accumulated Depreciation still reduces Non Current Assets –And neither affect Cash Flow because there is no money involved – it is a non cash transaction.

The effect of depreciation on the accounting equation AssetsDecrease (Accumulated Depreciation decrease the non- current asset LiabilitiesNo effect Owner’s Equity Decrease (Depreciation Expense decreases Net Profit)

Which methods are being used to depreciate these assets?

Accounting Principle Consistency demands that once a method of depreciation is chosen, that method should be used from one reporting period to the next.

Qualitative Characteristic Comparability is achieved in the reports if consistent depreciation methods are used. This allows reports to be compared from one period to the next.

Interpreting graphs

1. Identify the method of depreciation each of the graphs best represents.

Graph 1 illustrates an asset which is depreciation by the same amount each year. Graph 2 illustrates an asses which is depreciation by a reducing or smaller each year i.e. the amount of depreciation expense in 2011 is less than in 2010, and the amount in 2012 is less than for 2011.

2. Describe the type of non-current asset that would be best suited to each type of depreciation.

Graph 1 illustrates the type of depreciation appropriate for an asset which contributes to revenue evenly over its useful life e.g. furniture and fittings. Graph 2 illustrates the type of depreciation appropriate for an asset which contributes more to revenue when it is new and contributes less as it approaches the end of its useful life e.g. computers or equipment.

3. Graph 1 relates to Display Stands with a historical cost of $90,000. Show how the asset would appear in the Balance Sheet on 31 st December Note the amount of Depreciation is shown so $20,000 + $20,000 = $40,000 by 31 st December 2011

3. Graph 1 relates to Display Stands with a historical cost of $90,000. Show how the asset would appear in the Balance Sheet on 31 st December Extract of Balance Sheet as at 31 st December 2011 Display stands90,000 Less Accumulated Depreciation of Display Stands 40,00050,000

4. Graph 2 relates to Motor Vehicles with a historical cost of $70,000. Show how the asset would appear in the Balance Sheet on 31 st Dec Note the amount of Depreciation is shown so $20,000 + $15,000 = $35,000 by 31 st December 2011

4. Graph 2 relates to Motor Vehicles with a historical cost of $70,000. Show how the asset would appear in the Balance Sheet on 31 st Dec Extract of Balance Sheet as at 31 st December 2011 Motor Vehicle70,000 Less Accumulated Depreciation of Motor Vehicles 35,000

Chapter 15 Accounting for non- current assets Go do Exercises 15.1 to 15.8