Financial Accounting Non-Cash Transaction †Free Samples for Students

Question: Discuss about the Financial Accounting Non-Cash Transaction. Answer: Decision Case: Depreciation can be defined as the non-cash transaction, which is written off to the net income, which enables the business to reduce the tax liability. The higher an organisation net income is adjusted downward the lesser the firm has to pay tax (Rahman, 2013). Even though depreciation is regarded as a non-cash transaction, it possesses a real effect on the statement of comprehensive income and balance sheet in accordance with AASB 101. Where an asset is found to be of complex in structure that requires installation in successive stages it must be considered for as being ready for use only after the installation has been completed to a stage where service or saleable product can be obtained. The AASB 101 prohibits an organisation to use any extraordinary items in the statement of comprehensive income. This allows for the preparation of the single statement of comprehensive income by displaying the other comprehensive income (Birt et al., 2014). The depreciation amount of any addition or extension of a current asset becomes an integral part of the asset and should be allocated over the completed stage where the saleable product can be obtained. Referring to the current context it is found that $1 million understate the depreciation. If the depreciation expenses are understated it will have an impact on both the statement of comprehensive statement and balance sheet in two similar ways. Referring to the current scenario it is suggested that charts of account must be obtained which comprises of the data for the depreciation expenses along with net income and retained earnings. Depreciation expenditure and net income both forms the part of net income line. It is recommended that identification becomes the most vital element in the determination of the depreciation amount that is understated on the income statement (Camfferman, 2014). Adjusting the depreciation expenses upward by debiting the depreciation expenses and crediting the accumulated depreciation is suggested as a corrective measure of dealing with the understated depreciation expenses. Hence, it should be noted that the accumulated depreciation turns to be the contra for the depreciation expenses. Furthermore, it is suggested that the retained earnings should be increased. This is because understatement of the depreciation expenditure causes the retained earnings to be overstated. This forms the final adjust ment in increase the retained earnings for the understated depreciation expenses amount. Mistakes due to the error in the arithmetic, poor estimation or carelessness usually requires making an adjustment entries either by debiting or crediting to the beginning of the retained earnings. The depreciation amount of the depreciable asset should be allocated on the systematic basis based on the useful life of the assets (Crawford et al., 2014). The method of depreciation that is applied on the asset must reflect the patter in the which the asset future economic benefit are consumed or lost by the entity. It is recommended that depreciation amount must be allocated from time to time when the depreciation of asset is primarily put into the use or held ready by the organisation. References Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J., Janson, P. (2014). Accounting: Business Reporting for Decision Making 5e. Camfferman, K. (2014). The International Accounting Standards Board.The Routledge companion to accounting, reporting and regulation, 301-317. Crawford, L., Helliar, C., Monk, E., Veneziani, M. (2014, March). International Accounting Education Standards Board: Organisational legitimacy within the field of professional accountancy education. InAccounting Forum(Vol. 38, No. 1, pp. 67-89). Elsevier. Rahman, A. R. (2013).The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of Its Participative Review Process. Routledge.