Non-Current Assets & Depreciation

1. What is Depreciation?

Definition: Depreciation is that part of the original cost of a fixed asset that is consumed during its period of use by the business. It must be charged to profit & loss (income statement) every year.

The amount charged in a year is an estimate of how much of the asset's overall economic usefulness has been used up in that accounting period.

Short exam answer (Stavros, Nov 12 Q2(a)(i), 2 marks): "Depreciation is an expense. It is charged to spread the cost of a non-current asset over its useful life."

Example: car bought for $100,000 → worth $90,000 after one year ⇒ $10,000 of the car has been used up = depreciation. If its life is 10 years and 2 years are used ⇒ 20 % of it is depreciated.

Why does the car lose value? tyres wear · interior gets old · scratches & dents · paint fades — it never stays brand new.

Non-current asset = bought to use in the business (not to resell) and lasts more than 1 year: buildings, machinery, equipment, furniture & fixtures, motor vehicles, computers.

Term	Also called (examiners use all of these!)
Cost	historical cost · original cost · purchase price · list price
Scrap value	salvage value · residual value (estimated, not actual — we only know it when we really sell)
Useful life	estimated life · life (management's estimate of years of benefit)
Accumulated depreciation	provision for depreciation · total depreciation charged till date
Net book value (NBV)	carrying value · written-down value = Cost − Accumulated dep.

2. Causes of Depreciation

Causes = the reasons a non-current asset loses value. There are 4 causes in 3 groups — the first two groups are the ones tested in exams.

① Physical deterioration

• Wear & tear through use: car tyres, seats and paint; machine parts damaged by use; furniture polish worn off.
• Erosion / rust / rot / decay: rust on metal parts, rot on wooden parts.

② Economic factors

• Obsolescence = becoming out of date, even if unused. e.g. a box-packed iPhone 6 bought 2 yrs ago is worth less because newer models came out. Typical for medical/musical equipment, computers, laptops, gadgets — anything technological.
• Inadequacy = asset no longer meets requirements (capacity/specification). e.g. the new software no longer runs on the old phone ⇒ inadequate.

③ Time factor

Mostly for intangible assets (cannot be touched): leases, patents, licences, import quota, franchise, permits. Nothing is done — with the passage of time the lease/licence loses value (this is called amortization).

3. Methods of Depreciation

Many methods exist in practice, buttests three: Straight line (cost method) · Reducing balance (diminishing balance) · Revaluation. Different asset types need different methods.

3.1 Straight Line / Cost Method

Used for assets used evenly every year (usage pattern equal / not easily identified): furniture · fixtures & fittings · buildings. Depreciation is the same amount every year over the useful life.

Cost − Scrap = depreciable cost (the technical name — you need not remember it). We deduct scrap value because that amount will come back when the asset is finally sold, so only the rest is "used up". e.g. buy for 50,000, sell after 5 yrs for 5,000 ⇒ scrap = 5,000.

• No scrap value given ⇒ simply Cost × Rate.
• Straight line always works on original cost — never NBV.
• Scrap / residual value is used only in straight line, never in reducing balance.
• Same depreciation every year unless an asset is bought or sold.

Advantage of SL (Nov 12 Q2(b) [2]): If a non-current asset generates equal benefit each year, it is fair to charge equal depreciation annually.   Teacher's picture: I use my chair about equally every year ⇒ $4,000 each year ⇒ straight line.

3.2 Reducing Balance / Diminishing Balance Method (RBM)

Used for technological assets: machines · equipment / computers · motor vehicles (also projectors, multimedia, gadgets). Depreciation decreases every year.

Year 1: no acc. dep. yet ⇒ Cost × Rate (same answer as straight line). Year 2: (Cost − yr-1 dep) × Rate. Year 3: (Cost − yr 1&2 dep) × Rate … Acc. dep. keeps growing ⇒ NBV keeps falling ⇒ depreciation falls.

	Straight line	Reducing balance
Applied on	original cost (− scrap)	NBV (cost − acc. dep.)
Yearly charge	equal every year	falls every year
Typical assets	furniture, fixtures, buildings	machines, equipment, computers, vehicles
Scrap value	used	never used

4. Revaluation Method

For low-cost items where depreciating each item separately is not worth it: loose tools (jack, screwdrivers, hammer in a garage) · laboratory items (beakers, tubes) · crockery & cutlery (plates, glasses, jugs) · plastic crates of a soft-drink truck.

We work with the value (fair value = what it would fetch if sold in present condition), not cost. Asset is debit ⇒ opening balance b/d on the debit side.

Asset NBV (value) account — Loose tools, crockery etc.

Details	$	Details	$
Balance b/d (opening value)	xxx	Disposal (VALUE of asset sold)	xxx
Bank / Payable (addition)	xxx	Income statement (current-yr depreciation)	xxx
		Balance c/d (closing value)	xxx
	xxx		xxx

• Buying: Dr Loose tools / Cr Bank (Cr Payable if bought on credit) — cash or credit makes no difference to the calculation.
• Selling: Cr asset / Dr Disposal — deduct the asset's VALUE in the books, not the cash received and not original cost.
• Disposal value rule: value given ⇒ use value; value not given ⇒ use disposal proceeds; never use original cost.
• No rate & no life needed. Question silent about the method (no rate, no life) ⇒ use revaluation.
• Common in single-entry and not-for-profit club accounts questions.

5. Policies for Charging Depreciation

Method (how much) ≠ Policy (for how long in the year of purchase / sale). 3 methods but only 2 policies:

Policy 1 — Full-year policy

"Charge a full year's depreciation in the year of purchase but no depreciation in the year of disposal." Use when required in the question, or when dates are not given and no other information is given.

• Dates don't matter: own the asset on 31 Dec? ⇒ full 12 months (bought 1 Jan, 1 Jul, 1 Oct or 1 Dec — same).
• Sold before year-end (even 30 Dec)? ⇒ nothing that year.

Policy 2 — Month-wise (time-proportion / pro-rata) policy

Charge depreciation for the exact months of ownership in the year of purchase and year of sale. Use when required, or when dates are given.

• Bought 1 Jan (YE 31 Dec) ⇒ 12/12 · 1 Jul ⇒ 6/12 · 1 Oct ⇒ 3/12 · 1 Dec ⇒ 1/12.
• Sold 31 Mar ⇒ 3/12 (Jan–Mar) · sold 30 Apr ⇒ 4/12.
• It is the more accurate method — hence used at AS / A Level.

6. Double Entry & Ledger Accounts

6.1 Journal entry for depreciation

Expense ⇒ debit the income statement. We do not credit the machine account itself — we credit a separate Provision for depreciation (= accumulated depreciation) account.

• "Provision" = an estimate of depreciation, credit in nature. It is not a liability — nobody is to be paid.
• Asset account = debit balance; provision = credit balance; Cost − Provision = NBV.
• Provision increases ⇒ credit; to remove it (asset sold) ⇒ debit it.
• Opening provision balance b/d is always on the credit side.
• Use separate cost + provision accounts for straight line & reducing balance; the single value account is used for revaluation.

6.2 How to write the asset (cost) account

• Opening balance b/d on the DEBIT side (none for a brand-new business).
• Buy ⇒ Dr asset; credit side of the entry = Bank (nothing said) or the supplier's name (e.g. Honda Ltd ⇒ bought on credit).
• Sell ⇒ Cr asset; the other side goes to Disposal — write the ORIGINAL COST (not the cash received, not NBV).
• Balance c/d goes on the shorter side; totals face each other. Only one item each side ⇒ just rule off (double line).
• Year with no transactions ⇒ still balance it: b/d = c/d. Don't skip it.
• Stop at 1st day after the last required year (asked up to 2016 ⇒ b/d on 1 Jan 2017).
• Separate accounts for separate assets (equipment ≠ office computers).

6.3 Provision for depreciation account

• Balance b/d credit (opening). Each year: Cr Income statement (this year's dep.). Asset sold: Dr Disposal with that asset's total depreciation to date. Balance c/d on the debit side.
• "Why isn't there a b/d in year 1?" — new business ⇒ no depreciation before.

7. Disposal of Non-Current Assets

Selling an asset ⇒ remove it from the books. Disposal account = temporary account that records the gain or loss. Four entries, always — and one side of each is Disposal.

#	Entry	Dr	Cr	Narrative
①	Write off cost	Disposal	Machine / Vehicle / Equipment	to write off the asset account on disposal
②	Write off total depreciation (purchase date → sale date)	Provision for dep. (Acc. dep.)	Disposal	to write off total depreciation of the asset sold
③	Record cash / cheque received	Bank / Cash / Debtor (Mr X)	Disposal	cash or cheque received on sale
④a	Loss	Income statement (loss)	Disposal	to record the loss on disposal
④b	Gain	Disposal	Income statement (gain)	to record the gain on disposal

• Sold on credit ⇒ debit the customer's name (Mr X / X Garage / "debtor") instead of bank.
• Loss ⇒ debit (loss reduces capital; capital is credit). Gain ⇒ credit income statement (gain increases capital).
• Write "(gain)" or "(loss)" in brackets next to Income statement — it carries 1 mark.
• Made in the general journal (book for non-routine transactions) — narratives only if asked.

Gain / loss — compare proceeds with NBV

Asset (cost) account — Equipment / Machine / Vehicle / Building

Details	$	Details	$
Balance b/d	xxx	Disposal	xxx
Bank / Payables (addition)	xxx	Balance c/d	xxx
	xxx		xxx
Balance b/d	xxx

Provision for dep. / Accumulated dep.

Details	$	Details	$
Disposal	xxx	Balance b/d	xxx
Balance c/d	xxx	Income statement (current-yr dep.)	xxx
	xxx		xxx
		Balance b/d	xxx

Disposal account (temporary — never has a balance c/d or b/d)

Details	$	Details	$
(Machine / Vehicle / Building) cost	xxx	Provision for dep. / Acc. dep.	xxx
Income statement (Gain)	xxx	Bank / Cash / Debtor name	xxx
		Income statement (Loss)	xxx
	xxx		xxx

• Disposal account always balances by itself — if it doesn't, you have made an error (sir: "you have shown your hidden talent").
• Dates: all entries carry the date of sale; only the income-statement line carries the year-end date.

Income statement & SOFP extracts

• "Extract" ⇒ only the part with depreciation / disposal. Start the income statement extract from gross profit (x); the only other income here is gain on disposal; depreciation & loss on disposal are expenses.
• SOFP columns: Cost | Accumulated dep. | NBV — figures are the balance c/d of each account. Cost − acc. dep. = NBV.

8. How to Calculate the Year's Depreciation

8.1 Full-year policy (additions & disposals in the year)

• New assets have no acc. dep. (bought at cost) ⇒ in RBM depreciate them on their cost.
• You cannot deduct cost of the asset sold from NBV — NBV and cost are different things (−100,000 from 96,000 would give a negative!). Either remove its cost and its acc. dep., or work out its NBV separately.
• If nothing was bought or sold: SL ⇒ rate × cost; RBM ⇒ rate × (cost − provision).
• If a question gives land + building (e.g. 50 % each) ⇒ depreciate only the building. An extension that adds value = capital expenditure ⇒ add it to cost and depreciate it.

8.2 Month-wise policy — 3 steps

Step	Which assets	Calculation
①	Used the full year (opening − sold)	cost × rate %
②	Disposed of this year	cost × rate % × (months owned) / 12
③	Bought this year	cost × rate % × (months owned) / 12

Add ①+②+③ = total depreciation for the year.

• Part-year only in purchase year and sale year; years in between are full 12 months.
• Residual value: fixed every year (deduct it each time) — straight line only.

9. Worked Question 1 — ARD Textiles (Straight Line 15 %)

① Machine (cost) account

Machine (Cost) Account

Details	$	Details	$
1 Feb 13 Bank	100,000	31 Dec 13 Balance c/d	100,000
1 Jan 14 Balance b/d	100,000
1 Aug 14 Honda Ltd	70,000
	170,000	31 Dec 14 Balance c/d	170,000
1 Jan 15 Balance b/d	170,000	31 Dec 15 Balance c/d	170,000
1 Jan 16 Balance b/d	170,000	1 Sep 16 Disposal	100,000
		31 Dec 16 Balance c/d	70,000
	170,000		170,000
1 Jan 17 Balance b/d	70,000

• No machines before 2013 ⇒ no opening b/d. Disposal side shows $100,000 (original cost) — not the $40,000 received.
• 2015: no transactions but account is still balanced (b/d = c/d). b/d on 1 Jan 17 = day after the last year asked.

Depreciation calculations (15 % SL, full-year policy)

Year	Cost owned at year-end	Working	Dep.
2013	A 100,000	100,000 × 15 %	15,000
2014	A + B&C = 170,000	170,000 × 15 %	25,500
2015	same as 2014	170,000 × 15 %	25,500
2016	B&C only 70,000 (A sold ⇒ no dep.)	70,000 × 15 %	10,500

② Provision for depreciation account

Provision for Depreciation Account

Details	$	Details	$
31 Dec 13 Balance c/d	15,000	31 Dec 13 Income Statement	15,000
		1 Jan 14 Balance b/d	15,000
31 Dec 14 Balance c/d	40,500	31 Dec 14 Income Statement	25,500
	40,500		40,500
		1 Jan 15 Balance b/d	40,500
31 Dec 15 Balance c/d	66,000	31 Dec 15 Income Statement	25,500
	66,000		66,000
1 Sep 16 Disposal (w)	45,000	1 Jan 16 Balance b/d	66,000
31 Dec 16 Balance c/d	31,500	31 Dec 16 Income Statement	10,500
	76,500		76,500
		1 Jan 17 Balance b/d	31,500

Closing provision 2016 = 66,000 + 10,500 − 45,000 = 31,500. The balance c/d each year are the figures that go in the SOFP.

③ Disposal — gain / loss working, entries, account

Disposal Account

Details	$	Details	$
1 Sep 16 Machine	100,000	1 Sep 16 Accumulated Dep.	45,000
		Bank / Customer	40,000
		31 Dec 16 Income Statement (loss)	15,000
	100,000		100,000

Loss was sold for less than book value (55,000). If proceeds had been 60,000 instead ⇒ 5,000 gain and the ④ entry reverses (Dr Disposal / Cr Income statement).

④ Income statement & SOFP extracts (straight line)

Income statement extract — year ended 31 Dec
	2013 $	2014 $	2015 $	2016 $
Gross profit	x	x	x	x
Add: Other income — Gain on disposal	–	–	–	–
Less: Expenses — Depreciation	(15,000)	(25,500)	(25,500)	(10,500)
Loss on disposal	–	–	–	(15,000)

Statement of financial position extract — as at 31 Dec
Non-current assets	2013 $	2014 $	2015 $	2016 $
Machine (cost)	100,000	170,000	170,000	70,000
Less: Accumulated dep.	(15,000)	(40,500)	(66,000)	(31,500)
Net book value	85,000	129,500	104,000	38,500

10. Worked Question 1 (cont.) — ARD Textiles, 20 % Reducing Balance

Machine (cost) account is identical whichever method is used (same 100,000 / 170,000 / 170,000 / 70,000). Only depreciation, provision, disposal and extracts change.

Tip: with RBM, work each machine separately: Machine A (2013, $100,000), Machines B & C (2014, $70,000 together) + a Total column.

Year	Machine A	Machines B & C	Total dep.
2013	100,000 × 20 % = 20,000 NBV 80,000	–	20,000
2014	80,000 × 20 % = 16,000 NBV 64,000	70,000 × 20 % = 14,000 (bought → on cost) NBV 56,000	30,000
2015	64,000 × 20 % = 12,800 NBV 51,200	56,000 × 20 % = 11,200 NBV 44,800	24,000
2016	sold — NO depreciation	44,800 × 20 % = 8,960 NBV 35,840	8,960

Year 1 is the same for SL and RBM (cost × rate). In 2014 A is depreciated on its NBV 80,000 but B&C (first year) on cost 70,000 — so we can't just apply 20 % to one lump. The 2016 depreciation is "much lower": the big machine A has been sold.

Provision for Depreciation Account (20 % RBM)

Details	$	Details	$
31 Dec 13 Balance c/d	20,000	31 Dec 13 Income Statement	20,000
		1 Jan 14 Balance b/d	20,000
31 Dec 14 Balance c/d	50,000	31 Dec 14 Income Statement	30,000
	50,000		50,000
		1 Jan 15 Balance b/d	50,000
31 Dec 15 Balance c/d	74,000	31 Dec 15 Income Statement	24,000
	74,000		74,000
1 Sep 16 Disposal (w)	48,800	1 Jan 16 Balance b/d	74,000
31 Dec 16 Balance c/d	34,160	31 Dec 16 Income Statement	8,960
	82,960		82,960
		1 Jan 17 Balance b/d	34,160

Disposal Account (RBM)

Details	$	Details	$
1 Sep 16 Machine	100,000	1 Sep 16 Provision for dep.	48,800
		Bank / Customer	40,000
		31 Dec 16 Income Statement (loss)	11,200
	100,000		100,000

Extracts — 20 % reducing balance
	2013	2014	2015	2016
Income st.: Depreciation	(20,000)	(30,000)	(24,000)	(8,960)
Income st.: Loss on disposal	–	–	–	(11,200)
SOFP: Machine (cost)	100,000	170,000	170,000	70,000
Less: Accumulated dep.	(20,000)	(50,000)	(74,000)	(34,160)
Net book value	80,000	120,000	96,000	35,840

SOFP/IS figures for the RBM version were not written on the board (video 15 stops at the machine account and the calculation table) — worked here by the same layout as the straight-line version.

11. Full-Year Policy — Practice Questions

Differences: SL charges on cost (60,000 → not NBV 36,000). RBM charges on NBV 2,400; the new 600 computers are added at cost because a new asset has no book value yet. Disposed equipment is excluded entirely (full-year policy).

12. Month-Wise Policy — Straight Line Questions

Year ended	Machine A $	Machine B $	Total for year $
31 Dec 2015	2,400	800	3,200
31 Dec 2016	1,200	3,200	4,400

Counting trick: bought 1 Apr ⇒ missing Jan, Feb, Mar (3 months) ⇒ 12 − 3 = 9. Count whichever side is shorter.

13. Month-Wise Policy — Reducing Balance Questions

Recipe: Year 1 = cost × rate × months/12 → NBV = cost − dep. → middle years = NBV × rate (full year) → NBV again → sale year = NBV × rate × months/12. Never use residual value with RBM.

Straight line or RBM — year 1 is always on original cost. SL keeps using cost; RBM switches to NBV from year 2.

14. Revaluation Method — Questions

Rules once more: use VALUE (never cost) · closing value of one year = opening value of the next · disposal: value if given, otherwise proceeds · cash/credit purchase doesn't matter · formula O + A − D − C.

Year	Opening	+ Addition	− Disposal	− Closing	Depreciation
2015	0	50,000	0	45,000	5,000
2016	45,000	75,000	6,000 (proceeds — no value given)	87,000	27,000
2017	87,000	0	4,000 (VALUE, not 3,000 / 5,000)	70,000	13,000

15. Ledger Accounts, Disposal & Extract Questions

15.1 Stavros — cost accounts (Aug 2012)

Same data as Q Stavros (§11). Only cost accounts now — rates and policy don't matter. Year ended 31 Aug 2012 ⇒ year began 1 Sep 2011 (b/d dated 1 Sep 11). Separate accounts for equipment and office computers (note 3 is a computer purchase — keep it out of equipment).

Equipment (Cost) Account

Details	$	Details	$
1 Sep 11 Balance b/d	60,000	31 Jan 12 Disposal	28,000
1 Feb 12 Bank	35,000	31 Aug 12 Balance c/d	67,000
	95,000		95,000
1 Sep 12 Balance b/d	67,000

Office Computers (Cost) Account

Details	$	Details	$
1 Sep 11 Balance b/d	8,000
20 Mar 12 Bank	600	31 Aug 12 Balance c/d	8,600
	8,600		8,600

Disposal side shows 28,000 (original cost), not the 10,000 cheque. Purchase with no supplier named ⇒ credit side = Bank.

15.2 Stavros — provision, disposal & SOFP

Provision for Depreciation of Equipment Account (y/e 31 Aug 2012)

Details	$	Details	$
31 Jan 12 Disposal	16,800	1 Sep 11 Balance b/d	24,000
31 Aug 12 Balance c/d	20,600	31 Aug 12 Income Statement	13,400
	37,400		37,400
		1 Sep 12 Balance b/d	20,600

Equipment Disposal Account

Details	$	Details	$
31 Jan 12 Equipment	28,000	31 Jan 12 Provision for Depreciation	16,800
		Bank	10,000
		31 Aug 12 Income Statement (loss)	1,200
	28,000		28,000

(d) SOFP extract — non-current assets at 31 Aug 2012 [6]
Non-current assets	Cost $	Acc. dep. $	NBV $
Equipment	67,000 (W1)	(20,600) c(i)	46,400
Office computers	8,600 (W2)	(6,350) (W3)	2,250
	75,600	(26,950)	48,650

NBV column was left blank on the board — completed here (46,400 / 2,250 / 48,650).

15.3 Sandbury — profit/loss on sale & journal

Disposal Account (Sandbury)

Details	$	Details	$
Motor vehicle	14,000	Provision for dep.	5,040
Income statement (gain)	540	X Garage	9,500
	14,540		14,540

Gain ⇒ the balancing figure falls on the debit side of disposal (opposite of a loss). Sold on credit ⇒ X Garage, not bank.

15.4 Sofea — provision account (y/e 29 Feb 2016)

Provision for Depreciation — Motor Vehicles

Details	$	Details	$
31 May 15 Disposal	7,000	1 Mar 15 Balance b/d	18,400
29 Feb 16 Balance c/d	22,050	29 Feb 16 Income Statement	10,650
	29,050		29,050
		1 Mar 16 Balance b/d	22,050

c/d check: 18,400 − 7,000 + 10,650 = 22,050. (Not worked on the board: NBV of vehicle sold = 16,000 − 7,000 = 9,000; sold for 8,400 ⇒ loss 600.)

15.5 Crosby Packing — provision account (c)

Start with the total depreciation on 1 Jan 2015 = machine A's 2014 charge (2,400) — B not yet owned. One combined account for both machines; when A is sold transfer its total depreciation to disposal.

Provision for Depreciation of Machinery Account

Details	$	Details	$
		1 Jan 15 Balance b/d	2,400
31 Dec 15 Balance c/d	5,600	31 Dec 15 Income Statement	3,200
	5,600		5,600
30 Jun 16 Disposal	6,000	1 Jan 16 Balance b/d	5,600
31 Dec 16 Balance c/d	4,000	31 Dec 16 Income Statement	4,400
	10,000		10,000
		1 Jan 17 Balance b/d	4,000

Check: remaining 4,000 = machine B only (800 + 3,200). Extra (not on the board): NBV of A = 12,000 − 6,000 = 6,000; sold for 7,500 ⇒ gain 1,500.

16. Full Questions — Amayi, Boris, Fortnam

Boris — Statement of financial position as at 30 April 2018
Non-current assets	Cost $	Acc. dep. $	NBV $
Premises	100,000	(66,000)	34,000
Computer equipment	40,000	(20,000)	20,000
Fixtures & fittings	10,000	(5,500)	4,500
			58,500
Current assets Inventory		22,500
Trade receivables 35,000 − prov. 1,400		33,600
Other receivables — advertising		6,000
Bank		3,000	65,100
Total assets			123,600
Capital opening 50,000 + profit 15,600 − drawings 25,200			40,400
Non-current liability 8 % bank loan 2020			60,000
Current liabilities Trade payables 22,000 + loan interest 1,200			23,200
Total capital & liabilities			123,600

Profit for the year 15,600 comes from the income-statement part of this question (not reproduced on the board page). Check: total assets = total capital + liabilities = 123,600 ✓. The trial balance also shows a Disposal account debit balance of 7,500 (a loss still to be transferred to the income statement).

(b) SOFP extract — non-current assets at 30 Sep 2021
	Cost $	Acc. dep. $	NBV $
Premises	130,000	(28,600)	101,400
Motor vehicles	55,000	(36,500)	18,500
Fixtures & fittings	8,000	(2,300)	5,700
	193,000	(67,400)	125,600

• If the examiner says part of the premises is land (e.g. 50 %/50 %), depreciate only the building part.
• Sold at carrying value (cost − acc. dep.) ⇒ no gain or loss. Vehicle example: cost 10,000 − acc. dep. 4,500 = carrying value 5,500; sold for 5,000 ⇒ loss 500; sold for 6,000 ⇒ gain 500.
• When only the carrying value + cost are given, acc. dep. of the item sold = cost − carrying value (1,000 − 500 = 500). If dates are given instead, work it out year by year as in Stavros.

17. Full Chapter Cheat-Sheet