Depreciation and Non-current Assets
This domain tests capital expenditure versus revenue expenditure, depreciation methods, carrying amounts, revaluation and disposals. Exam questions require depreciation calculations and ledger entries, including the effect on profit and the statement of financial position.
Core rules
- Non-current assets are held for use, not sale, and are expected to benefit more than one period.
- Depreciable amount = cost (or revalued amount) less residual value.
- Straight-line: equal expense over useful life. Reducing balance: a percentage applied to carrying amount. Units of production: based on usage.
- Depreciation starts when the asset is available for use and stops at disposal; it is not charged on land.
- Disposal gain or loss = proceeds less carrying amount at disposal.
- Revaluation increases go to other comprehensive income and revaluation surplus, subject to rules.
Worked example
A machine costs 10,000, has residual value 1,000 and a five-year life. Straight-line depreciation = (10,000 - 1,000) / 5 = 1,800 per year. After two years, accumulated depreciation is 3,600 and carrying amount is 6,400. If sold for 7,000, the gain is 7,000 - 6,400 = 600. The disposal account is credited with proceeds, debited with carrying amount, and the 600 gain is recognised in profit or loss.
Traps
- Depreciating land.
- Deducting residual value twice.
- Charging a full year in the year of disposal without checking policy.
- Treating a revaluation surplus as profit.