Non-Current (Fixed) Assets

Slide 8.
Chapter 8
Non-current (fixed) assets
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Slide 8.2
Definitions
Asset
• Resource… from which future economic
benefits are expected to flow.
Non-current (fixed) assets
• Held for use in profit generating process.
• On a continuing basis.
• Not for sale in ordinary course of business.
Slide 8.3
Classification
• Property, plant and equipment, also called tangible

non-current (fixed) assets.
• Intangible non-current (fixed) assets.
• Investments held long term.
Intangible: No physical substance

• Patents
• Trade marks
• Development costs
• Goodwill
Slide 8.4
Valuation
Normally at
• Cost less accumulated depreciation equals
• NET BOOK VALUE (NBV) or
• depreciated cost.
Revaluation of non-current (fixed) assets
• Asset is given a valuation above cost.
• Usually applied to land and buildings.
• Revaluation is a choice for the company.
• If used, revaluations must be updated regularly.
Slide 8.5
Cost of non-current (fixed) assets
At acquisition
• Purchase price of an asset plus the cost of
preparing it for use.
– Legal costs of acquisition and installation and
commissioning costs.
Slide 8.6
Improvements after purchase

Improvement expenditure may extend the asset’s
annual output capacity
• increasing its economic life.
• reducing associated running costs.
• improving the quality of its output.
Costs incurred to improve on the asset’s original
condition: for example
• extension to a building.
• rebuilding shop fittings to attract new type of
customer.
These costs should be added to the original cost of
the asset and depreciated over the remainder of its
useful life.
Slide 8.7
Repairs, restoration
Costs incurred to maintain, repair or restore

the asset to its original condition– treated as
an expense and charged to the profit and
loss account: for example,
• replacing roof damaged in storm.
• replacing engine in bus.
Slide 8.8
Depreciation
• Non-current (fixed) assets are gradually

used up in providing goods and services
over time.
• Purpose of accounting depreciation is to
spread the cost of a non-current (fixed)
asset over its expected useful life.
• Depreciation is a method of allocating cost.
• Achieves a matching of costs against the
related revenues.
Slide 8.9
Depreciation (Continued)
In historical cost (traditional) accounting:

• the Net Book Value (NBV) is the result of a
calculation.
(Original cost – Accumulated depreciation)
• it is not intended to represent the asset’s
market value.
Slide 8.10
Non-current (fixed) Assets and Depreciation
Year Assets – Liabilities = Ownership

interest
1 ↓ ↓
2 ↓ ↓
3 ↓ ↓
etc.
Slide 8.11
Yearly depreciation,
Accumulated depreciation
• Each year that a non-current (fixed) asset is in
use, a portion of its cost is deducted from the
balance sheet value. That portion of cost is
‘matched’ against the revenues of that year. This
gives the depreciation charge of the year.
(Income statement profit and loss account).
• The depreciation of the non-current (fixed) asset in
each year is added to the depreciation of earlier
years to arrive at the Accumulated depreciation.
(Balance sheet).
Slide 8.12
Calculation of depreciation
Requires three items of information:

• the cost of the non-current (fixed) asset.
• the estimated useful life.
• the estimated residual value (the value
remaining at the end of the useful life).
Slide 8.13
Total depreciation
Total depreciation of the non-current (fixed)

asset is equal to the cost of the non-current
(fixed) asset minus the estimated residual
value.
Slide 8.14
Purpose and methods
The purpose of the depreciation calculation is

to spread the total depreciation over the
estimated useful life.
Methods of depreciation
(a) Straight-line method
(b) Reducing value
Slide 8.15
Straight-line depreciation
• Those who believe that a non-current (fixed)

asset is used evenly over time apply a method
of calculation called straight-line depreciation.
The formula is:
Cost – Expected residual value

Expected life
Slide 8.16
(Continued)
Non-current (fixed) asset, which has a cost of
£1,000 and an expected life of 5 years. The
expected residual value is nil. The calculation
of the annual depreciation charge is:
£1,000 – nil
= £200 per annum
5
Accounting policy:
Depreciation is charged on a straight-line
basis at a rate of 20% of cost per annum.
Slide 8.17
(Continued)
‘Straight line’ – a graph of the net book value of
the asset at the end of each year produces a
straight line.
Slide 8.18
Pattern of depreciation and net book value

End of Depn of the year Total depn Net book value of
year the asset
(b) (c) (£1,000 – c)
£ £ £
1 200 200 800
2 200 400 600
3 200 600 400
4 200 800 200
5 200 1,000 nil
Table 8.1 Pattern of depreciation and net book value over the life of an asset
Slide 8.19
Straight-line depreciation – graph of

net book value
1200
1000
800
net book value
600
400
200
0
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Graph of net book value over Years 1 to 5, for the straight-line method of
Figure 8.1
depreciation
Slide 8.20
Reducing-balance depreciation
• Those who believe that the non-current

(fixed) asset depreciates faster in the
earlier years of its life would calculate the
depreciation. Formula:
Fixed percentage ×
the net book value at the start of the year
Slide 8.21
Reducing balance depreciation

(Continued)
The rate of depreciation to be applied
under the reducing balance method of
depreciation is calculated by the formula:
R
rate = (1n ) × 100%
C
where n = the number of years of useful life
R = the estimated residual value
C = the cost of the asset
Slide 8.22

(Continued)
Example calculation
n = 5 years
C = £1,000
R = £30 (The residual value must be of
reasonable magnitude. To use an amount of nil for the
residual value would result in a rate of 100%).
5 30
Rate = (1 ) × 100% = approx 50%
1,000
Slide 8.23
Reducing balance calculation
Year Net book value at Annual depreciation Net book value at

start of year end of year
(a) (b) = 50% of (a) (a–b)
£ £ £
1 1,000 500 500
2 500 250 250
3 250 125 125
4 125 63 62
5 62 31 31
Table 8.2 Calculation of reducing-balance depreciation

Slide 8.24

– graph of net book value
1200
1000
800
net book value
600
400
200
0
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Graph of net book value over Years 1 to 5, for the reducing-balance

Figure 8.2
method of depreciation
Slide 8.25
Retaining cash in the business
• Fee income £120,000. Pay wages and other costs

£58,000. Depreciation calculated as £10,000.
• How much may the owner take in drawings?
• Cash available is £62,000.
• But if that is taken for personal use there is nothing
left in the bank to put towards asset replacement.
• Take cash of £52,000 leaves £10,000 towards
asset replacement.
• Problem – business may spend the £10,000 on
other aspects of business, such as buying current
assets or repaying loans.
Slide 8.26
Presentation in financial statements
Example:
On 1 January Year 2 Electrical Instruments
purchased a three-year lease of a shop for
£60,000. The accounts over the next three
years would include the following items
related to the lease.
Slide 8.27
Income statement (profit and loss account)
Year ended 31 Dec Yr 2 Yr 3 Yr 4

£000’s £000’s £000’s
Depreciation expense 20 20 20
Balance sheet at 31 Dec

60 60 60
Lease at cost
Less: Accumulated 20 40 60
depreciation
Net book value 40 20 0
Slide 8.28
Straight-line with residual value
The Removals Company was set up on 1

January Year 2, purchased van for £60,000,
and started to trade.
The manager estimates that:
1. The van will be used for 3 years; and
2. Estimated residual value of £6,000 (second
hand or scrap value).
Slide 8.29
Calculation
• Net cost of the van

= (£60,000 – £6,000) = £54,000.
• Net cost has to be depreciated over 3 years.
i.e. (54,000/3) = £18,000 per year.
Assume:
• During the year cash receipts from sales were
£120,000
• and cash expenses were £58,000 for wages,
petrol and running costs.
Slide 8.30
Balance sheet – end Year 2

£000’s
Van at cost 60
Less:
Accumulated depreciation (18)
Net book value 42

Cash 62
104
Ownership interest at start 60

Profit for the year 44
104
The Removals Company: Statement of financial position (balance sheet) at
Table 8.4
end of Year 2 and Income statement (profit and loss account) for Year 2
Slide 8.31
Income statement (profit and loss

account) Year 2
£000’s
Fees for removal work 120
Cash expenses (58)
Depreciation (18)
(76)
Profit for the year 44
The Removals Company: Statement of financial position (balance sheet) at

Table 8.4
end of Year 2 and Income statement (profit and loss account) for Year 2 (Continued)
Slide 8.32
Balance sheet
Year 2 Year 3
£000’s £000’s
Van at cost 60 60
Less: Accumulated depreciation 18 36
Net book value 42 24
Cash 62 124
104 148
Ownership interest
OI at start 60 104
Profit and loss account 44 44
104 148
The Removals Company statement of financial position (balance sheet) at
Table 8.6
end of Year 3 and Income statement (profit and loss account) for Year 3
Slide 8.33
Income statement (profit and loss account)

Year 2 Year 3
£000’s £000’s
Turnover 120 120
Cash expenses (58) (58)
Depreciation (18) (18)
76 76
Profit for the year 44 44
The Removals Company statement of financial position (balance sheet) at

Table 8.6
end of Year 3 and Income statement (profit and loss account) for Year 3 (Continued)
Slide 8.34
Presentation
See text book for more detail on

• Spreadsheets
• Presentation
Slide 8.35
Chapter 8
Bookkeeping supplement
Slide 8.36
Debit and credit entries in ledger accounts
DEBIT ENTRIES CREDIT ENTRIES
Left-hand side of the equation
Asset Increase Decrease

Right-hand side of the equation
Liability Decrease Increase

Ownership interest Expense Revenue
Capital withdrawn Capital contributed
Table 8.12 Rules for debit and credit entries in ledger accounts
Slide 8.37
Analysis of transactions for the Removals company, Year 2
Date Transaction or event Amount Dr Cr
Year 2 £
1 Jan Owner contributes cash 60,000 Cash Ownership
interest
1 Jan Purchase furniture van 60,000 Van at cost Cash
All year Collected cash from 120,000 Cash Sales
customers
All year Paid for running costs 58,000 Running Cash
costs
31 Dec Calculate annual 18,000 Depreciation Accumulated
depreciation expense depreciation
Table 8.13 Analysis of transactions for The Removals Company, Year 2

Slide 8.38
Ledger accounts required to record

transactions
L1 Ownership interest L4 Accumulated depreciation of
van
L2 Cash L5 Sales
L3 Van at cost L6 Running costs
L7 Depreciation of the year
Slide 8.39
Ledger accounts required to record transactions

(Continued)
L1 OWNERSHIP INTEREST
DATE PARTICULARS PAGE DEBIT CREDIT BALANCE
Year 2 £ £ £
Jan 1 Cash L2 60,000 (60,000)
L2 CASH
Year 2 £ £ £
Jan 1 Owner’s capital L1 60,000 60,000
Jan 1 Van L3 60,000 nil
Jan– Sales L5 120,000 120,000
Dec
Jan– Running costs L6 58,000 62,000
Dec
Slide 8.40

transactions (Continued)
L3 VAN AT COST
Year 2 £ £ £
Jan 1 Cash L2 60,000 (60,000)
L4 ACCUMULATED DEPRECIATION OF VAN
Year 2 £ £ £
Dec Depreciation for L7 18,000 (18,000)
31 the year
Slide 8.41

L5 SALES
Year 2 £ £ £
Jan– Cash L2 120,000 (120,000)
Dec
L6 RUNNING COSTS
£ £ £
Jan– Cash L2 58,000 58,000
Dec
Slide 8.42

L7 DEPRECIATION OF THE YEAR
£ £ £
Dec Accumulated L4 18,000 18,000
31 depreciation
Slide 8.43
Trial balance at the end of Year 2 for

the Removals company
Ledger account title £ £
L1 Ownership interest 60,000
L2 Cash 62,000
L3 Van at cost 60,000
L4 Accumulated depreciation of van 18,000
L5 Sales 120,000
L6 Running costs 58,000
L7 Depreciation 18,000 _______
Totals 198,000 198,000
Table 8.14 Trial balance at the end of Year 2 for The Removals Company

Non-Current (Fixed) Assets

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Non-Current (Fixed) Assets

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Slide 8.

Non-current (fixed) assets

• Property, plant and equipment, also called tangible

Intangible: No physical substance

Cost of non-current (fixed) assets

Improvements after purchase

Costs incurred to maintain, repair or restore

• Non-current (fixed) assets are gradually

In historical cost (traditional) accounting:

Non-current (fixed) Assets and Depreciation

Year Assets – Liabilities = Ownership

Requires three items of information:

Total depreciation of the non-current (fixed)

Purpose and methods

The purpose of the depreciation calculation is

• Those who believe that a non-current (fixed)

The formula is:

Cost – Expected residual value

Pattern of depreciation and net book value

Straight-line depreciation – graph of

• Those who believe that the non-current

Reducing balance depreciation

Reducing balance depreciation

Reducing balance calculation

Year Net book value at Annual depreciation Net book value at

Table 8.2 Calculation of reducing-balance depreciation

Reducing balance depreciation

Graph of net book value over Years 1 to 5, for the reducing-balance

Retaining cash in the business

• Fee income £120,000. Pay wages and other costs

Presentation in financial statements

Income statement (profit and loss account)

Year ended 31 Dec Yr 2 Yr 3 Yr 4

Balance sheet at 31 Dec

Straight-line with residual value

The Removals Company was set up on 1

• Net cost of the van

Balance sheet – end Year 2

Net book value 42

Ownership interest at start 60

Income statement (profit and loss

The Removals Company: Statement of financial position (balance sheet) at

Income statement (profit and loss account)

The Removals Company statement of financial position (balance sheet) at

See text book for more detail on

Debit and credit entries in ledger accounts

DEBIT ENTRIES CREDIT ENTRIES

Left-hand side of the equation

Asset Increase Decrease

Liability Decrease Increase

Analysis of transactions for the Removals company, Year 2

Date Transaction or event Amount Dr Cr

Table 8.13 Analysis of transactions for The Removals Company, Year 2

Ledger accounts required to record

Ledger accounts required to record transactions

DATE PARTICULARS PAGE DEBIT CREDIT BALANCE

Ledger accounts required to record

DATE PARTICULARS PAGE DEBIT CREDIT BALANCE

L4 ACCUMULATED DEPRECIATION OF VAN

DATE PARTICULARS PAGE DEBIT CREDIT BALANCE

Ledger accounts required to record

DATE PARTICULARS PAGE DEBIT CREDIT BALANCE

Ledger accounts required to record