Accounting For Depreciation And Disposal of Non-Current Assets (Copy)
ACCOUNTING FOR DEPRECIATION AND DISPOSAL OF NON-CURRENT ASSETS — COMPLETE O LEVEL & IGCSE ACCOUNTING GUIDE
DEFINITION OF DEPRECIATION
| Concept | Detailed Explanation | Common Mistakes | Examiner Expectations |
|---|---|---|---|
| Depreciation | Reduction in the value of a non-current asset over time due to use, wear and tear, obsolescence or passage of time. | Saying depreciation means physical damage only. | Must mention reduction in value over time. |
| Non-current Asset | Asset kept for long-term use in the business. | Including inventory. | Must distinguish from current assets. |
| Accumulated Depreciation | Total depreciation charged on an asset since purchase. | Confusing with annual depreciation. | Cumulative total required. |
| Net Book Value | Cost of asset less accumulated depreciation. | Forgetting accumulated depreciation deduction. | Important calculation point. |
CAUSES OF DEPRECIATION
| Cause | Explanation | Example |
|---|---|---|
| Wear and Tear | Asset physically deteriorates through use. | Machinery |
| Obsolescence | Asset becomes outdated due to technology changes. | Computers |
| Passage of Time | Value decreases over time regardless of use. | Leasehold property |
| Depletion | Natural resources reduce through extraction. | Mines |
PURPOSES OF DEPRECIATION
| Purpose | Explanation | Common Errors |
|---|---|---|
| Matching Principle | Matches asset cost with revenue earned. | Weak explanation |
| True Profit Calculation | Prevents overstating profit. | Ignoring expense effect |
| True Asset Valuation | Shows realistic asset value. | Saying asset shown at market value |
| Replacement Planning | Helps business prepare for replacement. | Saying cash saved automatically |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
METHODS OF DEPRECIATION
STRAIGHT-LINE METHOD
| Feature | Details | Common Mistakes |
|---|---|---|
| Meaning | Equal amount of depreciation charged every year. | Using percentage on NBV |
| Formula | (Cost − Residual Value) ÷ Useful Life | Forgetting residual value |
| Annual Charge | Constant every year | Changing yearly amount |
| Suitable For | Assets giving equal benefit yearly | Wrong application |
REDUCING BALANCE METHOD
| Feature | Details | Common Mistakes |
|---|---|---|
| Meaning | Fixed percentage charged on net book value each year. | Applying on original cost |
| Formula | Net Book Value × Rate % | Using straight-line formula |
| Annual Charge | Decreases every year | Same depreciation yearly |
| Suitable For | Assets losing value quickly | Weak explanation |
DEPRECIATION FORMULAS
| Method | Formula |
|---|---|
| Straight-line | (Cost − Residual Value) ÷ Useful Life |
| Reducing balance | Net Book Value × Rate % |
STRAIGHT-LINE DEPRECIATION FORMAT
| Year | Cost ($) | Depreciation ($) | Accumulated Depreciation ($) | Net Book Value ($) |
|---|---|---|---|---|
| 1 | XXXX | XXXX | XXXX | XXXX |
| 2 | XXXX | XXXX | XXXX | XXXX |
REDUCING BALANCE FORMAT
| Year | Opening NBV ($) | Depreciation (%) | Depreciation ($) | Closing NBV ($) |
|---|---|---|---|---|
| 1 | XXXX | XX% | XXXX | XXXX |
| 2 | XXXX | XX% | XXXX | XXXX |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
DOUBLE ENTRIES FOR DEPRECIATION
| Transaction | Debit Entry | Credit Entry |
|---|---|---|
| Depreciation charged directly | Depreciation Expense | Asset Account |
| Provision method used | Depreciation Expense | Provision for Depreciation |
PROVISION FOR DEPRECIATION ACCOUNT
| Feature | Details |
|---|---|
| Purpose | Accumulates total depreciation separately |
| Advantage | Original asset cost remains unchanged |
| Nature | Credit balance account |
| Financial Statement | Deducted from asset in SOFP |
FORMAT OF PROVISION FOR DEPRECIATION ACCOUNT
| Debit (Dr) | Provision for Depreciation Account | Credit (Cr) |
|---|---|---|
| Disposal of asset | Â | Balance b/d |
| Balance c/d | Â | Depreciation charged |
ASSET DISPOSAL
| Concept | Explanation | Common Mistakes |
|---|---|---|
| Disposal | Sale or removal of non-current asset. | Forgetting accumulated depreciation |
| Profit on Disposal | Sale proceeds exceed net book value. | Comparing with original cost |
| Loss on Disposal | Sale proceeds lower than net book value. | Wrong comparison |
| Net Book Value | Cost − accumulated depreciation | Core calculation |
STEPS IN ASSET DISPOSAL
| Step | What To Do | Importance |
|---|---|---|
| Step 1 | Update depreciation to disposal date | Frequently missed |
| Step 2 | Transfer asset cost to disposal account | Removes asset |
| Step 3 | Transfer accumulated depreciation | Calculate NBV |
| Step 4 | Record sale proceeds | Complete disposal |
| Step 5 | Calculate profit/loss | Final balancing |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
ASSET DISPOSAL ACCOUNT FORMAT
| Debit (Dr) | Asset Disposal Account | Credit (Cr) |
|---|---|---|
| Asset cost transferred | Â | Provision for depreciation transferred |
| Profit on disposal | Â | Bank/sale proceeds |
| Â | Â | Loss on disposal |
DOUBLE ENTRIES FOR DISPOSAL
| Transaction | Debit Entry | Credit Entry |
|---|---|---|
| Transfer asset cost | Asset Disposal | Asset Account |
| Transfer accumulated depreciation | Provision for Depreciation | Asset Disposal |
| Sale proceeds received | Bank | Asset Disposal |
| Profit on disposal | Asset Disposal | Income Statement |
| Loss on disposal | Income Statement | Asset Disposal |
PROFIT OR LOSS ON DISPOSAL
| Situation | Result |
|---|---|
| Sale proceeds > Net book value | Profit on disposal |
| Sale proceeds < Net book value | Loss on disposal |
| Sale proceeds = Net book value | No profit/loss |
COMMON EXAM MISTAKES
| Mistake | Why It Loses Marks |
|---|---|
| Forgetting depreciation for final year | NBV incorrect |
| Using original cost instead of NBV | Wrong profit/loss |
| Reversing disposal entries | Entire account incorrect |
| Forgetting accumulated depreciation transfer | Disposal incomplete |
| Applying reducing balance on cost | Wrong depreciation calculation |
| Ignoring residual value in straight-line | Formula error |
FREQUENTLY TESTED TRAPS
| Trap | Correct Handling |
|---|---|
| Part-year depreciation | Time apportion correctly |
| Asset sold mid-year | Charge depreciation until disposal date |
| Disposal with provision account | Transfer accumulated depreciation |
| Straight-line depreciation | Equal yearly charge |
| Reducing balance | Percentage on NBV |
| Trade-in asset | Treat old asset as disposal |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
ADVANTAGES AND DISADVANTAGES OF METHODS
| Method | Advantages | Disadvantages |
|---|---|---|
| Straight-line | Simple and equal charge yearly | Unrealistic for some assets |
| Reducing balance | More realistic for assets losing value quickly | More complex calculations |
HIGH-SCORING EXAM TECHNIQUES
| Question Type | Best Approach |
|---|---|
| Depreciation calculation | Use correct formula carefully |
| Disposal account | Follow steps systematically |
| Theory questions | Mention matching principle |
| Profit/loss disposal | Compare proceeds with NBV |
| Provision account | Keep original asset cost unchanged |
QUICK REVISION SUMMARY
| Item | Key Point |
|---|---|
| Depreciation | Reduction in asset value |
| Straight-line | Equal yearly depreciation |
| Reducing balance | Percentage on NBV |
| NBV | Cost − accumulated depreciation |
| Disposal Profit | Proceeds > NBV |
| Disposal Loss | Proceeds < NBV |
| Provision Account | Stores accumulated depreciation |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.