BACHELOR OF BUSINESS
MANAGEMNET
FIN2254
WEEK 10
PROVISION FOR DEPRECIATION
Learning Objective(s)
1. To understand the types of assets that require
depreciation
2. To understand the accounting concepts relating to
depreciation namely matching and prudence
3. To understand the difference between capital and
revenue expenditure
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Learning Outcome(s)
1. Students should be able to identify the types of assets
that require depreciation and apply the appropriate
depreciation method.
2. Students should also demonstrate their understanding
and describe the accounting concepts in line with
depreciation.
3. Be familiar with the difference between capital and
revenue expenditure.
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Introduction
 This chapter explains the types of assets requiring
depreciation. The accounting concept in relation to
depreciation is explained as well. Additionally, the
difference between capital and revenue expenditure is
also explained.
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Types of asset – Plant Asset
 Have three characteristics:
i)
They have a physical substance (a definite size and
shape)
ii)
Used in the operations of a business
iii)
Not intended for sale to customers

Also called property, plant and equipment; or noncurrent assets.
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Types of asset - Land
 Includes all costs to acquire land and ready it for use.
 Costs typically include:

the purchase price;

closing costs, such as title and attorney’s fees;

real estate brokers’ commissions;

costs of grading, filling, draining, and clearing;

assumption of any mortgages, or encumbrances on the
property.
Types of assets - Buildings

Buildings are facilities used in operations, such as stores, offices, factories,
and warehouses.

Includes all costs related directly to purchase or construction.

Construction costs:
•

Contract price plus payments for architects’ fees, building permits, and
excavation costs.
Purchase costs:
•
Purchase price, closing costs (attorney’s fees, title insurance, etc.) and
real estate broker’s commission.
•
Remodeling and replacing or repairing the roof, floors, electrical wiring,
and plumbing.
Accounting Concepts
 Matching Concepts
The cost of using assets to earn revenue should be
matched in the Profit and Loss Account to the revenue
earned
 Prudence
If the cost of using fixed assets was not included in the
Profit and Loss Account, profit would be overstated.
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Capital & Revenue Expenditure
 Capital expenditure is expenditure which results in the
acquisition of non-current assets, or an improvement in
their earning capacity.
 Revenue expenditure is expenditure which is incurred for
the purpose of the trade of the business or to maintain
the existing earning capacity of non-current assets.
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Conclusion/Summary

All assets that have a finite useful life should be
depreciated.

Provision for depreciation is made to comply with the
concept of Matching and Prudence.

Since revenue items and capital items are accounted for
in different ways, the correct calculation of profit for any
accounting period depends on the correct classification
of items as revenue or capital.
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References
1. F. Wood (2015). Business Accounting. Pitman
Publishing 13th Edition. ISBN9781292084664
F3 FINANCIAL ACCOUNTING (FA) Apr 16, 2018 by
Kaplan Publishing. ISBN9781787400801
F7 FINANCIAL REPORTING (FR) Apr 16, 2018by
KaplanPublishing.ISBN9781787400856
•SEGi
University & Colleges. All rights reserved.
Key Terms:
Term
Capital expenditure
Revenue expenditure
Definition
When a business spends money to buy or add value to a
fixed asset.
Expenses needed for the day-to-day running of the business
Prudence is the concept that specifies, in situations where
Prudence concept
there is uncertainty, appropriate caution is exercised in
recognizing transactions in financial records.
Matching concept is also known as Accruals Concept. This
Matching concept
concept states that, in computing profit, amounts are included
in the accounts in the period when they are earned or
incurred, not received or paid.
A resource with economic value that an individual,
Assets
corporation or country owns or controls with the expectation
that it will provide future benefit
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