Depreciation and Non-Current Assets
What the exam tests
This domain tests capital expenditure versus revenue expenditure, depreciation methods, accumulated depreciation, carrying amount and disposal calculations. Expect straight-line and reducing-balance figures.
Core rules
- Depreciation allocates the depreciable amount of a non-current asset over its useful life.
- Straight-line depreciation = (cost - residual value) / useful life.
- Reducing-balance depreciation = carrying amount x fixed percentage.
- Accumulated depreciation is a credit-balance contra-asset; carrying amount = cost - accumulated depreciation.
- On disposal, compare sale proceeds with carrying amount to find profit or loss.
Worked example
A machine costs 12,000, has a residual value of 2,000 and a five-year life. Straight-line depreciation = (12,000 - 2,000) / 5 = 2,000 per year. After two years, accumulated depreciation is 4,000 and carrying amount is 8,000. If sold for 7,500, the loss on disposal is 8,000 - 7,500 = 500. The depreciation charge is an expense; accumulated depreciation is not an expense.
Traps
Do not depreciate the residual value under straight-line. Do not charge a full year's depreciation in the year of disposal if the asset was sold part-way through; depreciate up to the disposal date. Do not treat repairs as capital expenditure. Do not credit the asset cost account when recording depreciation; credit accumulated depreciation.
Key points
- Depreciation is an allocation of cost, not a valuation.
- Straight-line uses cost less residual value.
- Carrying amount equals cost less accumulated depreciation.
- Disposal profit or loss compares proceeds with carrying amount.