First for thanks for the quality education
?My question is that what is residual value and what is scrap value ? Are both the same thing ?
?After 5 years its NBV = 0 OR 1 Then if it's still sold for 500 then it's the profit earned from disposal ?
J
John MoffatTutor·
The residual value and scrap value mean the same. As for the rest of your question you need to watch the rest of the lectures on depreciation - this is only the introduction.
M
Maxamed·
You said warranty will show profit and loss, so you mean I will add revenue line or Expense line?
J
John MoffatTutor·
Paying for a warranty is an expense in the SOPL.
M
Maxamed·
I Understood, thank you John.
J
John MoffatTutor·
You are welcome :-)
A
Asif·
Hello sir,
Do all non current assets depreciate ?
If not, which ones do ?
Also, depreciation not being a true value - its decided by us correct ? - the year of its lifespan, and therefore the expense per year, as the goal is just to spread and even out the costs over the years of the SOPL.
J
John MoffatTutor·
I do say in the lectures that we depreciate all assets that have a limited life and that the only asset you will come across in the exam that we do not depreciate is land.
The aim is to spread the cost as the asset earns us income. How we do it (and which method we use) is up to the company.
S
shakir7385·
Hi John,
Thank you for your continued effort. I have following two queries:
1) If we are sure that the car we bought for $20,000 will be fully depreciated by the end of fifth year. Its value become zero (or 1) in our books. But in market it will still be sold of the half of its original price i.e. on $10,000. Then why do we generally keep 5 years depreciation in case of car. Why can't we take more years.
2) Why we are required to fully depreciate anything? Like in case of car where we have its value of $20,000, if we are charging depreciation on 5 years to make it fully depreciate. If we already know that after 5 years its market price will be $10,000 then why we can't charge depreciation only keeping $10,000 in depreciation account. e.g. $2,000 depreciation per year for 5 years.
J
John MoffatTutor·
1. There is no rule that depreciation should be over 5 years. It is up to the company to decide on their depreciation policy.
2. There is no requirement to fully depreciate. As I explain in the following lectures, when using straight line depreciation we take into account any expected sale value (and it is only going to be an estimate - we cannot possibly already know what the market price will be in 5 years time), and when using reducing balance depreciation it is irrelevant anyway.
K
Kok Hue·
Thanks John .
J
John MoffatTutor·
Thank you for your comment :-)
E
eshant1205·
Hello sir,
Hope u doing well. Sir i wanted to ask the journal entry for assets purchased by utilising Reserve maintained for its purchase
First entry would be
Fixed Assets A/c Dr
To Vendor A/c or To Bank A/c
Please explain how to give entries for reserve utilisation
J
John MoffatTutor·
The second entry would be to transfer the same amount from the replacement reserve to retained earnings.
This is only relevant for limited companies, which are dealt with in a later chapter. The replacement reserve is not required by law but is kept separate by some companies just to make it clear why they are not paying out all the profits as dividend - however, again, this is explained in the chapter on limited companies.
S
skhan10·
I understand it’s better to spread the cost of the life of the asset. But wouldn’t there be a big discrepancy in the money we have and what our financial statements says.
Imagine we bought 10 cars for £20,000. For 5 year duration.
That’s £200,000 cash gone from our business account. But on SOPL we’ll only show £160,000 as our non current assets.
And £40,000 as our depreciation expense.
Where would we write that £200,000 has left the business in the first instance ?
J
John MoffatTutor·
There will be no discrepancy.
On the SOFP (not the SOPL!) we show the breakdown of the original cost and the accumulated depreciation subtracted.
When we buy the assets, non-current assets increase by 200,000 and cash falls by 200,000. When we depreciate, the non-current assets fall by 40,000 and the profit falls by 40,000.
It will maybe be more clear when you have watched the following lectures where I show the double-entries.
B
Bennett·
If it's a simple repair it's a revenue expenditure, but the asset altered,
improved or upgraded, the cost is capital expenditure.
J
jonathanlopez·
no that's revenue expenditure, since the machine is already in the building, capital expenditure is only when you buy new equipment
P
pellagia·
After 5 years; referring to the example you gave us, how will l record the non-current asset in the statement of financial position?
As in what amount will l record in case it has not yet been disposed of?
J
John MoffatTutor·
After 5 years the net book value / carrying value will be zero. However in practice (especially if there is only the one asset) then the depreciation in the final year will often be $1 lower, so that the asset stays on the SOFP at a value of $1. However that is up to the business to decide and is not a rule.
P
pellagia·
Thank you very much!
J
John MoffatTutor·
You are welcome :-)
O
ollmir·
Hi,
Is the training how to use it or for the staff how to use the machine a revenue or capital expenditure ?
Thank you
J
John MoffatTutor·
It is revenue expenditure.
Only costs of getting the machine itself into a working condition are capitalised.
O
ollmir·
Thanks a million John ! You are very good !
J
John MoffatTutor·
Thank you for your comment :-)
J
John MoffatTutor·
kingkonsajang:
Repairs to an existing machine are always revenue expenditure.
(If there is the unusual situation where you buy machinery second-hand and it is not working when you buy it, then and only then would repairs to make it working initially be treated as capital expenditure. However I cannot imagine this ever being relevant for the exam).
?My question is that what is residual value and what is scrap value ? Are both the same thing ?
?After 5 years its NBV = 0 OR 1 Then if it's still sold for 500 then it's the profit earned from disposal ?
Do all non current assets depreciate ?
If not, which ones do ?
Also, depreciation not being a true value - its decided by us correct ? - the year of its lifespan, and therefore the expense per year, as the goal is just to spread and even out the costs over the years of the SOPL.
The aim is to spread the cost as the asset earns us income. How we do it (and which method we use) is up to the company.
Thank you for your continued effort. I have following two queries:
1) If we are sure that the car we bought for $20,000 will be fully depreciated by the end of fifth year. Its value become zero (or 1) in our books. But in market it will still be sold of the half of its original price i.e. on $10,000. Then why do we generally keep 5 years depreciation in case of car. Why can't we take more years.
2) Why we are required to fully depreciate anything? Like in case of car where we have its value of $20,000, if we are charging depreciation on 5 years to make it fully depreciate. If we already know that after 5 years its market price will be $10,000 then why we can't charge depreciation only keeping $10,000 in depreciation account. e.g. $2,000 depreciation per year for 5 years.
2. There is no requirement to fully depreciate. As I explain in the following lectures, when using straight line depreciation we take into account any expected sale value (and it is only going to be an estimate - we cannot possibly already know what the market price will be in 5 years time), and when using reducing balance depreciation it is irrelevant anyway.
Hope u doing well. Sir i wanted to ask the journal entry for assets purchased by utilising Reserve maintained for its purchase
First entry would be
Fixed Assets A/c Dr
To Vendor A/c or To Bank A/c
Please explain how to give entries for reserve utilisation
This is only relevant for limited companies, which are dealt with in a later chapter. The replacement reserve is not required by law but is kept separate by some companies just to make it clear why they are not paying out all the profits as dividend - however, again, this is explained in the chapter on limited companies.
Imagine we bought 10 cars for £20,000. For 5 year duration.
That’s £200,000 cash gone from our business account. But on SOPL we’ll only show £160,000 as our non current assets.
And £40,000 as our depreciation expense.
Where would we write that £200,000 has left the business in the first instance ?
On the SOFP (not the SOPL!) we show the breakdown of the original cost and the accumulated depreciation subtracted.
When we buy the assets, non-current assets increase by 200,000 and cash falls by 200,000. When we depreciate, the non-current assets fall by 40,000 and the profit falls by 40,000.
It will maybe be more clear when you have watched the following lectures where I show the double-entries.
improved or upgraded, the cost is capital expenditure.
As in what amount will l record in case it has not yet been disposed of?
Is the training how to use it or for the staff how to use the machine a revenue or capital expenditure ?
Thank you
Only costs of getting the machine itself into a working condition are capitalised.
Repairs to an existing machine are always revenue expenditure.
(If there is the unusual situation where you buy machinery second-hand and it is not working when you buy it, then and only then would repairs to make it working initially be treated as capital expenditure. However I cannot imagine this ever being relevant for the exam).