Chapter 6: Non-Current Asset Depreciation
Depreciation:
o The decrease in value of a non-current asset over time which represents the cost of
using the asset
o The amount is recorded as an expense in the SoPL
o Accrual Concept: The cost of using the non-current asset is matched with the
revenues the asset helped generate in a given accounting period
o It is a non-cash transaction
Causes of Depreciation
o Wear and Tear
o Obsolescence
o Reduction of natural resources (mines)
o Passage of time (leases)
Methods of Depreciation
o Straight-Line Method
The same amount of depreciation is charged every year
Cost −Residual Value
Depreciation per year = Useful Economic Life
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Depreciation per year = Depreciation % ×(Cost−Residual Value )
o Reducing Balance Method
A fixed percentage of the carrying value is depreciated each year
Carrying Value = Cost – Accumulated Depreciation
Depreciation expense in a given year
= Depreciation % ×Carrying Value of Asset
o Revaluation Method
Mainly used for a collection of important items that are individually not
worth a lot. Items such as printers, stationery, telephone etc.
The assets are simply revalued each year
The change (usually decrease) in value represents depreciation
o Effect on Profit
SL method: profit is reduced by the same amount every period
RB method: depreciation is higher in the early years and hence profit will be
lower.
Taking higher maintenance costs of later years into account, RB may
be an accurate representation of the actual costs of using the asset.
o Changing methods of depreciation
Must be done with good reason
The new method should be a more accurate representation of asset usage
than the previous method
Otherwise a change will violate the accounting concept of consistency and
may be an attempt to overstate or understate profits and asset value.
What if asset was purchased or sold during the year?
o Depreciate on a monthly basis (Pro rata)
o Full year of depreciation is charged in year of purchase and none in year of disposal
o Full year of depreciation is charged in year of disposal and none in year of purchase
Double Entry for Depreciation
o Depreciation is adjusted for at the end of the financial year
o Asset account is recorded at cost and is not adjusted at all
o Double Entry:
Debit Depreciation Expense: asset name (Expense account whose balance is
then transferred to statement of profit and loss)
Credit Provision for Depreciation: asset name (negative asset account that
records the accumulated depreciation of an asset and is shown on the
statement of financial position)
Disposal of Non-Current Assets
o Sell a non-current asset at the end of its useful life or prior to
o If the amount received is greater/less than its carrying value then there will be a
profit/loss on disposal
o Profit on disposal is recorded as other operating income
o Loss on disposal is reported as an expense
o Double Entry:
Remove the non-current asset (cost):
Debit Disposal account; Credit Non-current asset account
Remove accumulated depreciation on the disposed asset:
Debit Provision for depreciation: asset account; Credit Disposal
account
Record proceeds from disposal:
Debit Cash/Bank; Credit Disposal account
If the balance on disposal account is a credit/debit then there is an
expense/gain transferred to the SoPL at the end of the period
Part Exchange of an Asset
o Sometimes non-current assets are sold to acquire a new one (part exchange)
o Normally the company will need to pay an extra amount in addition to disposing the
old asset to acquire the new asset.
o The part exchange value of the old asset is the difference between the amount paid
and the cost of the new asset
o A profit or loss on disposal is the difference between the part exchange value and
the carrying value
o Double entry:
Remove old asset: same as disposal
Remove accumulated depreciation: same as disposal
Acquire new asset:
debit non-current asset account twice;
credit cash/bank and credit disposal account (part exchange value)
Schedule of Non-Current Assets:
o Summary of the movement of non-current assets over the year
o Shows additions, disposals, revaluation, and depreciation charges to each type of
non-current asset
