Depreciation and Non-Current Assets
Depreciation isn’t about working out what an asset is “worth” today — it’s about spreading its cost fairly over the years it’s used, so each year’s accounts reflect a fair share of that cost.
1. What Depreciation Is
Depreciation is the systematic allocation of the cost of a non-current asset over its useful life, matching the cost of using the asset against the revenue it helps generate each year (the matching/accruals concept). It is not an attempt to value the asset.
2. Straight-Line Method
This gives the same depreciation charge every year.
(12,000 − 2,000) / 5 = $2,000 per year
3. Reducing Balance Method
This gives a larger charge in early years, decreasing each year — but the net book value never quite reaches zero.
Year 1: 8,000 × 25% = $2,000. NBV at end of Year 1 = 8,000 − 2,000 = $6,000.
Year 2: 6,000 × 25% = $1,500. NBV at end of Year 2 = 6,000 − 1,500 = $4,500.
4. Disposal of Non-Current Assets
When an asset is sold, a disposal account removes its cost and accumulated depreciation, records the sale proceeds, and the balancing figure is the profit or loss on disposal.
Profit on disposal = 4,500 − 4,000 = $500 profit
- Using the ORIGINAL cost instead of net book value in the reducing balance calculation for Year 2 onwards.
- Forgetting the revaluation method is used for assets without individual identity (like loose tools), valued at the start and end of the year, with the decrease treated as the depreciation charge.
- Confusing depreciation with a fall in market value — they are different concepts; depreciation is an accounting allocation, not a market valuation.
Key Vocabulary Recap
Syllabus Reference
Practice questions
Depreciation and Non-Current Assets — Practice
Covers: straight-line and reducing-balance depreciation, and disposal accounts. 10 questions.
Define depreciation.
A machine costs $12,000, has a residual value of $2,000, and a useful life of 5 years. Calculate the annual straight-line depreciation charge.
A vehicle costs $20,000, has a residual value of $5,000, and a useful life of 3 years. Calculate the annual straight-line depreciation charge.
Equipment with a net book value of $8,000 is depreciated at 25% per year using the reducing balance method. Calculate the depreciation charge for Year 1 and Year 2.
Explain one difference between the straight-line and reducing balance methods of depreciation.
Explain when the revaluation method of depreciation is used, and how it is calculated.
An asset originally cost $10,000, with accumulated depreciation of $6,000, and is sold for $4,500. Calculate the profit or loss on disposal.
An asset with a net book value of $3,000 is sold for $2,200. Calculate the profit or loss on disposal.
Explain why depreciation is not the same as a fall in an asset’s market value.
Explain why depreciation is charged, referring to the matching (accruals) concept.
Worked solutions
Show worked solutions
Depreciation and Non-Current Assets — Practice: Solutions
Define depreciation.
Machine $12,000, residual $2,000, life 5yrs.
Vehicle $20,000, residual $5,000, life 3yrs.
NBV $8,000, 25% reducing balance, Years 1 and 2.
Difference between the two methods.
When/how is the revaluation method used?
Cost $10,000, acc.dep $6,000, sold $4,500.
NBV $3,000, sold $2,200.
Why isn’t depreciation the same as a fall in market value?
Why is depreciation charged (matching concept)?
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