IGCSE Accounting — Depreciation and Non-Current Assets: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 4: Accounting Procedures

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

Annual depreciation = (Cost − Residual value) / Useful life

This gives the same depreciation charge every year.

Worked example — straight-line depreciation A machine costs $12,000, has an estimated residual value of $2,000, and a useful life of 5 years. Calculate the annual depreciation charge.
(12,000 − 2,000) / 5 = $2,000 per year

3. Reducing Balance Method

Annual depreciation = Net book value × depreciation rate

This gives a larger charge in early years, decreasing each year — but the net book value never quite reaches zero.

Worked example — reducing balance depreciation Equipment with a net book value of $8,000 is depreciated at 25% per year using the reducing balance method. Find the depreciation charge for Year 1 and Year 2.
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/loss on disposal = Sale proceeds − Net book value at disposal

Worked example — disposal account An asset originally cost $10,000, with accumulated depreciation of $6,000 (so its net book value is $4,000), is sold for $4,500. Calculate the profit or loss on disposal.
Profit on disposal = 4,500 − 4,000 = $500 profit

Common mistakes to watch for

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

Net book value (NBV) — cost minus accumulated depreciation

Residual value — the estimated value of an asset at the end of its useful life

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 4, Depreciation and Non-Current Assets: the meaning and purpose of depreciation, the straight-line, reducing-balance, and revaluation methods, and disposal accounts.

Practice questions

IGCSE Accounting 0452 · Section 4: Depreciation and Non-Current Assets — Practice Question Bank (no answers)

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.

Q10

Explain why depreciation is charged, referring to the matching (accruals) concept.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 4: Depreciation and Non-Current Assets — Solutions

Depreciation and Non-Current Assets — Practice: Solutions

Define depreciation.

✓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 — it is not an attempt to value the asset.

Machine $12,000, residual $2,000, life 5yrs.

(Cost−Residual)/Life

(12,000−2,000)/5

✓$2,000 per year

Vehicle $20,000, residual $5,000, life 3yrs.

(Cost−Residual)/Life

(20,000−5,000)/3

✓$5,000 per year

NBV $8,000, 25% reducing balance, Years 1 and 2.

Year 1: NBV×25%

8,000×0.25=2,000; new NBV=6,000

Year 2: new NBV×25%

6,000×0.25

✓Year 1: $2,000. Year 2: $1,500

Difference between the two methods.

✓Straight-line gives an equal depreciation charge every year. Reducing balance gives a larger charge in early years, which decreases each year as it’s calculated on a shrinking net book value.

When/how is the revaluation method used?

✓It’s used for assets without a clear individual identity, such as loose tools. The asset (as a group) is valued at the start and end of the year, and the decrease in value over the year is treated as the depreciation charge.

Cost $10,000, acc.dep $6,000, sold $4,500.

NBV = Cost − Accumulated depreciation

10,000−6,000=4,000

Profit/loss = Proceeds − NBV

4,500−4,000

✓$500 profit on disposal

NBV $3,000, sold $2,200.

Profit/loss = Proceeds − NBV

2,200−3,000

✓$800 loss on disposal

Why isn’t depreciation the same as a fall in market value?

✓Depreciation is a planned accounting allocation of an asset’s cost over its useful life, based on estimates of useful life and residual value — it doesn’t attempt to track the asset’s actual resale or market value, which can rise or fall independently for many other reasons.

Q10

Why is depreciation charged (matching concept)?

✓The matching (accruals) concept requires that the cost of using an asset to generate revenue is recognised in the same period as that revenue. Since a non-current asset is used over many years, its cost is spread out (depreciated) over those years, rather than being charged entirely as an expense in the year it was purchased.

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