Sale and Disposal of Non Current Assets

(To learn this chapter, it is recommended to know the chapter depreciation very well)

During the year, it may be that a firm has bought or sell its assets.

PRINCIPLE:
                         1.  Dr Disposal of non current asset's account
                              Cr Non current asset's account

The disposal and asset's accounts should be debited and credited with the cost price of the asset, that is, at the price at which it was bought.

                         2.  Dr Provision for depreciation of non current asset's account
                              Cr Disposal of non current asset's account

This transaction should be recorded with the accumulated depreciation amount.

                         3. Dr Bank / Cash account
                             Cr Disposal of non-current account

This transaction should be recorded by the amount of money received on the sale of the asset which is also known as the sales proceed.

Example:
Mr. X bought 3 motor vehicles each costing $2 000 on 1st April 2012. He depreciates his assets, 10% on cost, from the date of purchase to the date of sale. On 31st March 2014 he sold one of the motor vehicle for $800, payment received by cheque. Draw up the motor vehicles, provision for depreciation of motor vehicles and disposal of motor vehicles accounts.

Depreciation

Most non current (fixed) assets lose value with time which is called depreciation.
Example of non current assets which depreciates are buildings, machinery, motor vehicle, furnitures and fittings, fixtures and fittings, office equipment, etc.

NOTE: 1. Land does not depreciate. Instead it appreciates. (It is an appreciating non current asset)
             2. Goodwill does not depreciate. The term used is amortisation (it has the same concept as                                depreciation but the technical term is different).

Definition of Depreciation
Depreciation is the fall in the value of non current assets.

Purpose of Depreciation
Depreciation is charged to spread the cost of a non current asset over its useful life.
It is also charged to comply with the accruals (matching) concept which states that all costs should be matched with the revenue earned.

Causes of Depreciation
1. Wear and tear (physical deterioration)
2. Passage of time
3. Depletion
4. Obsolescence (change in technology; outdated)

Methods of Depreciation
There are three methods of depreciation namely: Straight-line method, reducing (diminishing) balance method and revaluation method.

Straight-line Method
When using the straight-line method, the non current asset depreciates evenly, that is by the same amount over its life.
To find depreciation using the straight line methods, the formula below can be used or a percentage can be given.

Example:
1. Universe Ltd bought a machine for $80 000. It has decided a residual (scrap) value of $8 000. The               machine is planned to be used for 10 years in the business. Calculate the depreciation that should be             charged each year.

2. Black purchases a motor vehicle for $ 100 000. He decides to charge 10% depreciation using the   straight-line method. Find the amount of depreciation at the end of the financial year.

Reducing (diminishing) Balance Method
When using this method of depreciation, the percentage depreciation should be charged on the net book value (that is, cost - accumulated depreciation) of the asset.

Example:
White owned furniture and fittings at cost $ 50 000. The provision for depreciation of furniture and fittings account (accumulated depreciation) had a balance of $35 000. He charges a 50% depreciation using the diminishing balance method. What is the depreciation charged for that particular financial year?

Revaluation Method
This method is used on tools which have low value where exact information is not required as per the materiality concept. Their value keeps fluctuating during the year. The formula to calculate the depreciation is as follows:

                     Opening inventory  +  Purchases  -  Closing inventory

Example:
Peter had an opening balance for loose tools valued $1 500 at the start of the year. During the year, he bought tools of $2 000. At the end of the year, the closing balance was $3 200. What is the depreciation for the loose tools?

Basic To Learn

Debit all expenses and losses
Credit all gains and profits

Debit all assets
Credit all liabilities

Accounting Concepts

There are 2 types of accounting concepts:

1. Fundamental accounting concepts

2. Underlying accounting concepts.

Fundamental Accounting Concepts

There are five accounting concepts:

1. Going Concern Concept

The going concern concept implies that the business will continue to operate in the foreseeable future. A business is a going concern if it has no intention to discontinue its activities. Accounts are usually prepared under the going concern concept. In case a business is not a going concern, assets will be shown at the price at which they may be sold when the business closes down.

2. Consistency Concept

A business must choose a method to record its transactions which will show a more realistic view of the business. If a business chooses one method to record one transaction, the consistency concepts states that it should continue to use this method in the subsequent years unless the method does not show a realistic view or an another valid reason is given.

3. Prudence Concept

The prudence concepts states that all losses should be recorded in the books as soon as they are recognized, but gains and profits should not be recorded unless they are realized, that is, the business should get the profit or gain in reality. The aim of the prudence concept is to prevent profits from being overstated.

4. Matching Concept (Accrual Concept)

The matching concept states that net profit is the difference between revenue and expenditure incurred. That is;

            NET PROFIT = REVENUE - EXPENDITURE

The matching concept also states that if an expense is incurred in a financial year, then the expense should be included in the final accounts of that year itself, whether the expense has been paid or not.

5. Materiality Concept

The materiality concept states that only items which are material will be recorded in the books. There is no need for absolute precision on the books. For instance, a pocket calculator costing only $8 will not be considered as a non-current asset, although its useful life is 5 years.

Underlying Accounting Concepts

1. Historical Cost Concept

Under the historical cost concept, the assets are shown at their cost price.

2. Money Measurement Concept

Accounting information consists of only those transaction which have a monetary value to which most people will agree. The limitation of this concept is that accounting can never provide each and every information of the business. For example, it cannot show whether the business has problem with the workforce.

3. Business Entity Concept

This concept states that the business has separate existence from that of the owner.

4. Dual Aspect Concept

The dual aspect concepts states that every transactions should have two aspects, one debit and the other credit (Double entry system is applied).

5. Time Interval Concept

This concepts states that final accounts should be prepared at a regular time interval of one year.