The document discusses accounting for non-current assets and depreciation. It explains that non-current assets are used for more than one accounting period and are depreciated over time. The document outlines different methods for calculating depreciation including straight-line, reducing balance, and units of production. It also discusses how to record depreciation expense in the books of accounts and present non-current assets in financial statements.

2. Accounting for Non-current Assets and
Depreciation
9

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After studying this chapter, you should be able to:
 Explain the concept of revenue expenditure and
capital expenditure
 Explain the concept and causes of depreciation
 Explain the concepts of original cost, scrap or residual
value, useful life, accumulated depreciation, and net
asset value
 Calculate and record depreciation expense by the
straight-line, reducing balance, and units of
production methods
Learning Outcomes

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Fundamentals of Financial Accounting (SECOND EDITION)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 1–4
 All businesses need not only current, but also non-
current assets (fixed assets), to operate.
 The reduction in the value of non-current assets,
i.e. the portion of the cost that is used up, is called
depreciation. It must be taken into account when
we prepare our financial statements.
 What is the nature of non-current assets and why
are they depreciated in the accounts?
 How is depreciation recorded in the books of
accounts and presented in the financial statements.
9.0 Introduction

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Fundamentals of Financial Accounting (SECOND EDITION)
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Business expenditure:
 Revenue expenditure
– Expenditure on items that contribute to the revenue-
earning capacities of a business and is expensed off
immediately to match the revenues of the same
accounting period.
– At the end of an accounting period, it is deducted
from revenue to determine the profit.
– Examples of such expenditure include salary, wages,
rental, utility bills and advertising expenses.
– Revenue items are dealt with in the Statement of
Profit of Loss and Other Comprehensive Income.
9.1 Revenue Expenditure and
Capital Expenditure

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Fundamentals of Financial Accounting (SECOND EDITION)
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 Capital expenditure
– Expenditure on items that contribute to the revenue-
earning capacities of a business, but the items are
expected to contribute for more than one accounting
period.
– It is the amount paid to acquire or extend the useful
lives of non-current assets or to reduce non-current
liabilities.
– Capital items are dealt with in the Statement of Financial
Position.
9.1 Revenue Expenditure and
Capital Expenditure (cont.)

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Three main accounting concepts form the basis for
calculating and recording depreciation:
 The going concern concept
 The historical cost concept
 The matching concept
9.2 Basic Ideas of Depreciation

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Causes of depreciation:
9.2 Basic Ideas of Depreciation
(cont.)

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Consideration must be given to the following three
factors to determine the rate of depreciation:
 The cost of the non-current asset (the total acquisition
cost incurred in bringing the asset to its current
location and condition)
 The useful economic life (the expected number of
years the asset can be used to generate profit)
 The estimated residual value/scrap value/disposal
value at the end of the asset’s useful life
9.3 Methods of Calculating
Depreciation

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The most common depreciation methods are:
 Straight-line method
– Based on the cost of the non-current asset less the
residual value, spread evenly over the useful economic
life of the asset. The amount of depreciation charged in
each period is the same.
 Reducing balance method
– Based on the carrying value of the asset at the
beginning of the financial period. The amount of
depreciation charged every period gradually decreases.
 Units of production method
9.3 Methods of Calculating
Depreciation (cont.)

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The most common depreciation methods are:
 Units of production method
– The cost of the non-current asset is spread out over
its useful life based on its use. Therefore, the useful
economic life of the fixed asset is estimated based on
the total production units which the non-current asset
can operate.
9.3 Methods of Calculating
Depreciation (cont.)

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There are two main bases for calculating depreciation
provisions for assets bought or sold during an accounting
period:
9.4 Bases of Providing
Depreciation

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 End-of-year basis (Yearly basis)
– We ignore the dates during the year when the assets
were bought or sold. We merely calculate a full period’s
depreciation on the assets in use at the end of the
period.
– Assets sold during the accounting period will have had
no provision for depreciation irrespective of how many
months they were in use.
– Assets bought during the period will have a full period of
depreciation calculated even though they may not have
been used throughout the whole period.
9.4 Bases of Providing
Depreciation (cont.)

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 Month-to-month basis (Monthly basis)
– The provision for depreciation is made on the basis of
“one month’s ownership, one month’s provision”.
– A fraction of a month is usually ignored. However, some
may consider it as one month’s ownership if they have
possessed the asset for more than or equal to 15 days.
9.4 Bases of Providing
Depreciation (cont.)

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9.5 Books of Accounts:
Recording Depreciation
 In recording depreciation in the books of
accounts, two types of accounts are maintained:
– Depreciation expense account
– Accumulated depreciation account

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 Where there is more than one type of non-current
asset, say three types (e.g. plant and machinery,
fixtures and fittings, and motor vehicles), then three
sets of non-current asset accounts, depreciation
accounts and allowance for depreciation accounts
must be maintained.
 Samples of the financial statements can be seen as
follows:
9.6 Dealing with More Than One
Type of Non-Current Asset

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9.6 Dealing with More Than One
Type of Non-Current Asset
(cont.)