Assets

Depreciation

Cost minus residual value, spread over the useful life.

Draft: not yet reviewed by a teacher

Why it exists

A bakery's oven works for ten years. Expensing its whole price in the year of purchase would show a loss in year one and inflated profits for the next nine. Depreciation puts the cost next to the revenue the asset helps to earn (the accruals concept).

Key rules

Depreciable amount = cost − residual value. Land is normally not depreciated.
Straight line: (cost − residual value) / useful life, the same charge every year.
Reducing balance: rate × carrying amount at the start of the year; it suits assets that give most of their benefit early.
Part years: with a monthly policy, count the months owned; with a full-year-in-year-of-purchase policy, read the question carefully.
A change in useful life or residual value is a change in estimate: recalculate from the current carrying amount onwards and leave past years alone.
Entry: Dr Depreciation expense, Cr Accumulated depreciation. On disposal, profit or loss = proceeds − carrying amount.

Examples

An oven bought on 1 April 2026 for 24,000, residual value 4,000, life 5 years, straight line, charged monthly; the year ends on 31 December.

Annual charge: (24,000 − 4,000) / 5 = 4,000
2026: 4,000 × 9/12 = 3,000
Carrying amount at 31.12.2026: 24,000 − 3,000 = 21,000
From 1 January 2028 (carrying amount 17,000) the remaining life is cut to 2 years: (17,000 − 4,000) / 2 = 6,500 a year

Straight line, a part year and a change in life

A van for 30,000, reducing balance at 25%.

Year 1: 30,000 × 25% = 7,500, carrying amount 22,500
Year 2: 22,500 × 25% = 5,625, carrying amount 16,875
Sold at the start of year 3 for 15,000: loss 16,875 − 15,000 = 1,875

Reducing balance and a disposal

How it works

The asset account keeps the original cost, while accumulated depreciation builds up in a separate credit-balance contra account. Carrying amount = cost − accumulated depreciation.

On disposal, both balances move to a Disposals account together with the proceeds; what is left on it is the profit or loss on disposal, which goes to profit or loss.

Traps

Taught in the course

Key rules

Depreciable amount = cost − residual value. Land is normally not depreciated.

Straight line: (cost − residual value) / useful life, the same charge every year.

Reducing balance: rate × carrying amount at the start of the year; it suits assets that give most of their benefit early.

Part years: with a monthly policy, count the months owned; with a full-year-in-year-of-purchase policy, read the question carefully.

A change in useful life or residual value is a change in estimate: recalculate from the current carrying amount onwards and leave past years alone.

Entry: Dr Depreciation expense, Cr Accumulated depreciation. On disposal, profit or loss = proceeds − carrying amount.