Depreciation (IGCSE O Level)
Depreciation (IGCSE O Level)
Non-current Assets
Tr Lai Yee Myo
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Non current assets
will lose value over time as they wear out or become out of date
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Depreciation is an estimate of the loss in value of a non-current assets
over its expected working life.
Cause of depreciation
▪Physical deterioration
▪ Economic reasons
▪Passage of time
▪Depletion (wells & mines)
******Land does not usually lose value*******
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Depreciation of NCA has two main effect
▪the depreciation for the year is included in the expenses in the income statement, so profit for
the year is not overstated (application of the principle of Prudence)
>>>>>>> It reduces profit (or increase loss) each year
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Methods of calculating depreciation
❑ Three main methods
Once a method has been selected for a particular non-current assets, it should be applied each
year ( principle of consistency)
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Estimate the following…………..
1. Useful life?
2. Residual value /scape value ?
3. Estimate loss on value (depreciation)
Revaluation method
(re-estimating a “fair value – small things)
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Straight line method
❖ fixed instalment / equal instalment method
❖used where each year is expected to benefit equally from the use of the asset
(For example – Buildings, factory)
❖ where same amount of depreciation (or the same % rate of the cost price ) is charged each year
❖Formula…….
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Income Statement
Year 1 Year 2 Year 3
(-) Expenses
Rent xxx xxx xxx
Electricity bill xxx xxx xxx
Interest xxx xxx xxx
Depreciation
expenses for
computer server 1600 1600 1600
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https://www.double-entry-
bookkeeping.com/depreciation/s
traight-line-method-quiz/
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Another way to calculate….
Straight-line depreciation expenses
Cost of building is $30000 and the owner depreciate the building with 10 % on cost. What is the total
depreciation expenses for the year?
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Straight line method
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Reducing Balance Method
❖ used where grater benefits form the use of the asset will be gained in the earlier years
of its life
❖ some assets lose more value in the first few years than they do later for example like
Computer equipment, motor vehicle
❖ Owner need to decide annual depreciation rate, for eg like 20% per year
❖ Any residual value is taken into consider
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Reducing Balance Method
is where the depreciation charged each year decreases as it is calculated on the
net book value rather than the cost
Formula…….
Annual depreciation charge = Net Book Value x …..%
❖same % rate is applied but it is calculated on Net Book Value - NBV each year
❖ the amount of depreciation reduces each year
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example…………….
On 1 Jan 2018, Stella purchased fixtures costing $22000. Calculate the depreciation
for fixtures using reduction balance method at the rate of 20% per annum.
Formula
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Income Statement
Year 1 Year 2 Year 3
Yr 1
(-) Expenses
Yr 2 Rent xxx xxx xxx
Electricity bill xxx xxx xxx
Yr 3 Interest xxx xxx xxx
Depreciation
expenses for
Yr 4
fixtures 10000 6000 3600
https://www.double-entry-
bookkeeping.com/depreciation/declining-
balance-method-quiz/
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Reducing Balance Method
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Revaluation method of depreciation
❖is used where it is not practical, or it is difficult, to keep detailed records of certain
types of non-current assets.
❖(for example… loose tools, hand tools , small item of equipment used in offices and
laboratories, packing cases etc… )
❖No detailed records are kept for these assets
❖The assets are valued at the end of each financial year
The amount by which the value of the asset has fallen is the depreciation for the year
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Example………
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Example………
Date Transactions Amount $
Jan 3 Hand tools purchased recorded in cash book 500
Jul 15 Add Additional tools purchased during the year 80
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Revaluation method of depreciation
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Session end!
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