AA015 TOPIC 9 PP

FINANCIAL ACCOUNTING
AA015

KOLEJ MATRIKULASI
NEGERI SEMBILAN
SESSION 2020/2021

TOPIC 9

ACCOUNTING FOR NON-
CURRENT ASSETS

Learning objectives

9.1 Definition and types of non-current assets
9.2 Compute and record the cost of
fixed assets.
9.3 Depreciation.

9.4 Disposal of fixed assets.

9.5 Presentation of fixed assets in the
Statement of Financial Position

9.1 Definition of non-current assets

❑ used in a business’ operations and not for
resale

❑ useful lives are more than one accounting
period

DEFINITION OF FIXED ASSETS
Long term tangible resources that are used in the
operation of the bussiness and are not intended for sale
to customer

Long term = useful lives are more than one accounting
period

9.1 Types of non-current assets

NON CURRENT ASSET

LONG TERM
INVESTMENT

FIXED INTANGIBLE

Touchable / No physical
can be seen existence such
eg ; Land,
as patents,
Vehicles copyrights,

goodwill

THREE IMPORTANT SUBJECTS
RELATED TO FIXED ASSETS

1 2 3

Cost of Depreciation Disposals
Purchase

9.2 Compute and record the cost of fixed assets.

ALL EXPENDITURES
NECESSARY TO ACQUIRE THE

ASSET AND MAKE IT READY
FOR ITS INTENDED USE =
CAPITAL EXPENDITURE

DETERMINATION THE COST OF FIXED ASSETS

Cost Price Cost to prepare the assets
for its intended use.

+ Transportation charges

Price in Invoice Installation & testing

Sales Tax

Legal Fees

9

DETERMINATION THE COST OF FIXED ASSETS

Cost which do not
extend the life of the

asset or do not
improve the asset are
revenue expenditures.
It is not part of asset

cost.
eg: Repairing cost

EXAMPLES

On January 1, 2020 the Syarikat Anggun buy a machine to be used
in business. Information on costs incurred with the purchase of
machine were as follows:

Price in invoice RM8,000

Sales Tax RM 100

Transportation charge RM 300

Installation cost RM 200

Transportation Insurance RM 100

Fire Insurance RM 150

RM8,850

Required:

Prepare a journal entries to record the purchase of machine.

SOLUTION

General Journal

Date Items Dr Cr
8,700 8,700
2020 Machinery

JAN 1 Cash

(To record purchase of machinery for cash)

(8,000+100+300+200+100)

9.3 Depreciation.

FRS (Financial Reporting Standard)
Define depreciation as :-

"The systematic allocation of the depreciable amount of an asset
over its useful life" (FRS 116)

Journal entries:

Dr Depreciation Expense xxx

Cr Accumulated Depreciation xxx

DEPRECIATION CONCEPT

Account

DEPRECIATION ACCUMULATED
EXPENSE DEPRECIATION

To declare the Contra to Fixed Asset
depreciation expense Account – Cr.

for current year – Report in Financial
Dr. Position as contra to
non current assets
Report in Profit or
Loss Statement as (fixed asset)

expenses.

DEPRECIATION CONCEPT

Perniagaan Ayu
Statement of Profit or Loss (extract)
For the year ended 31 December 2019

Sales xx
- COGS xx
Gross Profit xx
( - ) Operational Expenses
870
Depreciation Expense

DEPRECIATION CONCEPT

Perniagaan Ayu

Statement of Financial Position (extract)

As at 31 December 2019

ASSET

Non Current Asset

Machine 8700

( - ) Accumulated Depreciation - Machine 870

7,830

BASIS IN CALCULATING DEPRECIATION
BASIS

MONTHLY YEARLY

MONTHLY BASIS

MONTHLY

PURCHASING SELLING
DATE DATE

1 – 15 16 – 31 16 – 31 1 – 15

Full month Not calculated Full month Not calculated
calculated calculated

YEARLY BASIS
YEARLY

PURCHASING SELLING
YEAR YEAR

FULL YEAR NO
DEPRECIATION DEPRECIATION

19

COMPUTING THE AMOUNT OF DEPRECIATION

METHODS OF DEPRECIATION

1 2 3 4

STRAIGHT REDUCING SUM OF UNITS OF
LINE BALANCE YEARS ACTIVITY
METHOD DIGIT METHOD
METHOD METHOD

20

STRAIGHT LINE METHOD

Allocates an equal amount of depreciation to each year and is
calculated as follows :
Yearly Basis:

Cost – Residual value @ % x (Cost – Residual value)
Useful life

STRAIGHT LINE METHOD - Example

A machine has been purchased on 1.1.2019. The cost of the asset is
RM130,000. The residual values is RM10,000 and useful life is 10 years.
Calculate depreciation expense at December 31, 2019.

Answer: = RM12,000
= RM130,000 – RM10,000

10

2019

Dec 31 Dr Depreciation Expense 12,000

Cr Accumulated Depreciation – Machine 12,000

(To record depreciation on Machine)

STRAIGHT LINE METHOD - Example

Statement of Financial Position (extract)
As at 31 December 2019

Non Current Assets: 130,000
12,000
Machine 118,000
(-) Accumulated Appreciation – machine

STRAIGHT LINE METHOD - Example

If an asset purchased on January 20, 2019;

a) Monthly Basis

Depreciation is calculated in the following month (Feb).

Feb → Dis = 11 x RM12,000

12

Depreciation Expense= RM11,000

b) Yearly Basis
Depreciation is calculated for the full year of purchase.

Depreciation Expense = RM12,000

REDUCING BALANCE METHOD

- Reducing Balance Method charges depreciation at a
higher amount in the earlier years of an asset.

- The amount of depreciation reduces as the life of the
asset progresses.

- Known as Declining Balance Method

REDUCING BALANCE METHOD
Depreciation per annum = (Net Book Value) x Rate%

Rate : Fixed

Book Value : Cost – Accumulated Depreciation

REDUCING BALANCE METHOD - EXAMPLE

Year Depreciation Expenses Accumulated Book Value
0 RM Depreciation RM

RM 50,000

2015 39% x 50,000 = RM19,500 19,500 30,500
2016 39% x 30,500 = RM11,895 31,395 18,605

2017 39% x 18,605 = RM7,256 38,651 11,349

2018 39% x 11,349 = 4,426 43,000 7,000
Up to RM4,349*
(RM11,349 - RM7,000)

REDUCING BALANCE METHOD - EXAMPLE

Syarikat Lekir purchased a machine in 2015 at a price of
RM50,000 which has a useful life of 4 years and the residual
value of the machine is RM7,000. The depreciation rate is
39%. Calculate the depreciation expense each year under the
reducing balance method.

9.4 Disposal of fixed assets.

DISPOSAL

12 3

RETIREMENT SALE EXCHANGE/
TRADE IN

DISPOSAL OF FIXED ASSETS STEPS

1 2 3

Remove the Remove Determine
old disposed accumulated the amount
depreciation of of gain or
asset disposed asset
loss

RETIREMENT - EXAMPLE

Machines purchased on January 1, 2015, RM 25,000. Estimated
useful life of 5 years and no residual value. The machine is
depreciated using the straight line method. On 31 December
2019, the machine discarded without residual value.

Journal:

Dr Accumulated Depreciation - Machine 25,000

Cr Machine 25,000

(To dispose the asset)

SELLING FIXED ASSETS BEFORE USEFUL LIFE

END

Gain / Loss = Cash Received – Book Value
(book value = cost – accumulated depreciation)

>Book Value Cash Received  LOSS

<Book Value Cash Received  GAIN

EXAMPLE

Machines purchased on January 1, 2015, RM25,000. Estimated
useful life of 5 years and no residual value. The machine is
depreciated using the straight line method. On January 1, 2017,
machine sold at a price of RM20,000

Accumulated Depreciation :
1/1/2005 – 1/1/2007 RM25,000 x 2 = RM10,000

5

SOLUTION

Cost Accumulated Depreciation

Gain / Loss :

Book Value = RM25,000 - RM10,000 = RM 15,000

Cash Received = RM 20,000

Gain = RM20,000 - RM15,000

= RM5,000

Journal :

Dr Cash 20,000

Dr Accumulated Depreciation - Machine 10,000

Cr Machine 25,000

Cr Gain on Disposal 5,000

(To dispose the asset)

EXAMPLE

Machines purchased on January 1, 2015, RM25,000. Estimated
useful life of 5 years and no residual value. The machine is
depreciated using the straight line method. On January 1, 2018,
machine sold at a price of RM8,000.

Accumulated Depreciation:
1/1/2005 – 1/1/2008 = RM25,000 x 3 = RM15,000

5

Gain / Loss :

Book Value = RM25,000 - RM15,000 = RM 10,000

Cash received = RM 8,000

Loss = RM8,000 – RM10,000

= RM2,000

35

SOLUTION

Journal :

Dr Cash 8,000
Dr Accumulated Depreciation-Machine 15,000
Dr Loss on Disposal
2,000
Cr Machine 25,000
(To dispose the asset)

EXCHANGE / TRADE IN FIXED ASSET
Gain / Loss = Trade-In Value – Book Value (Old assets)

>Book Value Trade-In Value  LOSS

<Book Value Trade-In Value  GAIN

EXAMPLE

Ronald Enterprise trade-in an old machine with a new machine. The
cost of new machine is RM8,000. The cost of the old machine is
RM20,000 and accumulated depreciation until the date of disposal
amounted to RM15,000. Trade-In Value for the old machine is
RM4,000.

Gain / Loss :
Book Value (old Asset) = RM20,000 – RM15,000 = RM5,000

Book Value RM5,000
(-) Trade-In Value RM4,000
Loss RM1,000

SOLUTIONS

Cash paid for new machine = Cost (New asset) – Trade-In Value
= RM8,000 – RM4,000

= RM4,000

Journal : 8,000
Dr Machine (New) 15,000
Dr Accumulated Depreciation-Machine(old)
Dr Loss on Disposal 1,000
20,000
Cr Machine (old) 4,000
Cr Cash
(To dispose the asset)

EXAMPLE

Ronald Enterprise trade-in an old machine with a new machine. The
cost of new machine is RM10,000. The cost of the old machine is
RM20,000 and accumulated depreciation until the date of disposal
amounted to RM16,000. Trade-In Value for the old machine is
RM5,500.

Calculation for gain/loss :
Book Value (old assets) = RM20,000 – RM16,000

= RM4,000

Book Value RM4,000
(-) Trade-In Value RM5,500
Gain RM1,500

40

SOLUTION = New Machine – Trade-In Value
= RM10,000 – RM5,500
Cash for new Machine = RM4,500

Journal :

Dr Machine (new) 10,000

Dr Accumulated Depreciation-Machine 16,000

Cr Machine (old) 20,000

Cr Cash 4,500

Cr Gain on disposal 1,500

(To dispose the asset)

9.5 Presentation of fixed assets in the Statement of Financial Position

❑ On the Statement of Financial Position, Fixed Asset are
reported at book value after deduct the accumulated
depreciation.

❑ Refer the example of Statement of Financial Position

Perniagaan Juara
Statement of Financial Position (extract)

As at 31 Dis 2019

Non Current Asset 3,250
325
Funiture 2,925
(-) Accumulated Depreciation-Furniture

Office Equipment 4,150

(-) Accumulated Depreciation-Off.Equipment 415

Total Non-current Assets 3,735
6,660

CONCLUSION

❑ Fixed Assets are a long term (more than 1 year) tangible
asset used in the operation of business.

❑ Each Fixed Assets cost should be allocate over its useful
life using specific method.

❑ Four methods of depreciation:
❑ Straight-line method
❑ Reducing Balance Method
❑ Sum of Years Digit Method
❑ Units of Activity

❑ Two basis of depreciation :
❑ Monthly
❑ Yearly

❑ Types of disposal:
❑ Retirement
❑ End of useful life
❑ Damage
❑ Stolen
❑ Sale
❑ Exchange/Trade in







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