Accounting For Depreciation And Disposal of Non-Current Assets (Copy)
Cheat Sheet: 4.2 Accounting for Depreciation and Disposal of Non-Current Assets
O Level and IGCSE Accounting – Quick Revision
Key Definitions
| Term | Definition |
|---|---|
| Depreciation | The decrease in value of a non-current asset over time due to use, wear, or obsolescence. |
Reasons for Charging Depreciation
- To match the cost of the asset with the revenue it generates
- To show a true and fair view of asset values in the statement of financial position
- To avoid overstating profit (non-cash expense must be included)
- Required by accounting principles (matching, prudence)
Methods of Depreciation
| Method | Formula | Used When |
|---|---|---|
| Straight-Line | Depreciation = (Cost − Residual Value) ÷ Useful Life | Asset gives equal benefit yearly (e.g. buildings) |
| Reducing Balance | Depreciation = Percentage × Net Book Value | Asset loses more value in early years (e.g. machines) |
| Revaluation | Asset is revalued and depreciation = change in value over time | Land/buildings when market value is available |
Example: Straight-Line Depreciation
Asset cost = $10,000
Residual value = $1,000
Useful life = 3 years
Annual depreciation = (10,000 − 1,000) ÷ 3 = $3,000 per year
Ledger Accounts for Depreciation
Provision for Depreciation Account (Straight-Line Example)
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Dec | Income Statement | 3,000 | |
| 31 Dec | Balance c/d | 3,000 | |
| Total | 3,000 | 3,000 |
Journal Entry for Charging Depreciation
Debit Income Statement
Credit Provision for Depreciation Account
Example:
Dr Income Statement 3,000
Cr Provision for Depreciation 3,000
Sale of Non-Current Asset – Steps
- Remove original cost from Asset Account
- Remove accumulated depreciation from Provision for Depreciation
- Record the sale proceeds in Bank/Cash
- Record gain or loss on Income Statement
- Use Disposal Account to bring all together
Example: Disposal Account (Sold for $2,500)
| Disposal of Equipment Account |
|---|
| Dr Equipment (Cost) – 10,000 |
| Cr Provision for Depreciation – 6,000 |
| Cr Bank (Sale proceeds) – 2,500 |
| Cr Income Statement (Loss) – 1,500 |
Journal Entries for Disposal
- Transfer cost of asset:
Dr Disposal Account
Cr Asset Account - Transfer accumulated depreciation:
Dr Provision for Depreciation
Cr Disposal Account - Record sale:
Dr Bank
Cr Disposal Account - Record profit or loss:
- If Cr > Dr → Profit
- If Dr > Cr → Loss
Entry:
Dr/Cr Disposal Account
Cr/Dr Income Statement