Depreciation of Non-Current Assets
Depreciation of Non-Current Assets
This domain tests depreciation methods, ledger treatment, and disposals. SPM questions often require the annual charge, accumulated depreciation, carrying amount, and gain or loss on disposal.
Core rules
- Depreciation allocates the cost of a non-current asset over its useful life; it is not a cash fund.
- Straight-line: (Cost - Residual value) / Useful life.
- Reducing balance: a fixed percentage of the carrying amount each year.
- The asset account stays at cost; accumulated depreciation is a contra-asset.
- Carrying amount = Cost - Accumulated depreciation.
- On disposal, remove cost and accumulated depreciation, record proceeds, and balance the disposal account to find gain or loss.
Worked example
A machine costs RM12,000, has residual value RM1,200 and a four-year life. Straight-line depreciation = (RM12,000 - RM1,200) / 4 = RM2,700 per year. After three years, accumulated depreciation = RM8,100 and carrying amount = RM3,900. If sold for RM3,500, loss on disposal = RM3,900 - RM3,500 = RM400. The disposal account is debited with the carrying amount and credited with proceeds; the RM400 difference is a loss.
Traps
- Charging depreciation on land, which normally is not depreciated.
- Treating accumulated depreciation as an asset.
- Calculating reducing-balance depreciation on original cost.
- Forgetting to remove accumulated depreciation on disposal.
Key points
- Depreciation is an allocation, not cash
- Straight-line uses cost less residual
- Reducing balance uses carrying amount
- Accumulated depreciation is contra-asset
- Disposal compares carrying amount with proceeds