0% found this document useful (0 votes)
7 views22 pages

Depreciation (IGCSE O Level)

The document discusses the depreciation of non-current assets (NCA), explaining that their value decreases over time due to various factors. It outlines the capital expenditure nature of NCA, the matching principle of spreading costs over their useful life, and the impact of depreciation on financial statements. Three main methods for calculating depreciation are presented: straight line, reducing balance, and revaluation method, each with specific applications and formulas.

Uploaded by

trlai yeemyo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
7 views22 pages

Depreciation (IGCSE O Level)

The document discusses the depreciation of non-current assets (NCA), explaining that their value decreases over time due to various factors. It outlines the capital expenditure nature of NCA, the matching principle of spreading costs over their useful life, and the impact of depreciation on financial statements. Three main methods for calculating depreciation are presented: straight line, reducing balance, and revaluation method, each with specific applications and formulas.

Uploaded by

trlai yeemyo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 22

Depreciation of

Non-current Assets
Tr Lai Yee Myo

1
Non current assets
will lose value over time as they wear out or become out of date

❑ Purchase of NCA is capital expenditure

❑ Capital expenditure of a business will not reduce profit


for the year

❑ The cost of NCA is not charged as an expense in the year


of purchase as it benefits the business for several years….

❑ The cost of NCA is spread over the years which benefit


form the use of that asset - depreciation (matching
principle)

2
Depreciation is an estimate of the loss in value of a non-current assets
over its expected working life.

▪ record only show an estimate of the loss in value of NCA


▪ exact amount will only be know when the asset is sold or disposed

Cause of depreciation
▪Physical deterioration
▪ Economic reasons
▪Passage of time
▪Depletion (wells & mines)
******Land does not usually lose value*******

3
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

▪ Prudence principle also applied in B/S (statement of financial position)


NCAs are recorded at a figure less than cost price – called Net Book Value / Written down value
(This override Historic cost principle – for more realistic values)
>>>>>>> It reduces value of its NCAs year on year

4
Methods of calculating depreciation
❑ Three main methods

❑Straight line method


❑Reducing balance method
❑Revaluation method

Once a method has been selected for a particular non-current assets, it should be applied each
year ( principle of consistency)

5
Estimate the following…………..
1. Useful life?
2. Residual value /scape value ?
3. Estimate loss on value (depreciation)

Straight line method


(equal installment)

3. Estimate loss on value Reducing balance method


(depreciation) (Loss more value in first few years)

Revaluation method
(re-estimating a “fair value – small things)

6
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…….

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒


Annual depreciation charge = = $ ….Dep exp.... for a year
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠

$ …….𝐷𝑒𝑝 𝑒𝑥𝑝…..𝑓𝑜𝑟 𝑎 𝑦𝑒𝑎𝑟


As a percentage = = ………. %
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑁𝐶𝐴

7
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

Depreciation expenses for a year = $ 1600


>>>>>>>>>go to Income statement as Depreciation expenses

8
https://www.double-entry-
bookkeeping.com/depreciation/s
traight-line-method-quiz/

Page
9 - 156
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?

Depreciation expense for the year = Cost of NCA x %


= $30000 x 10%
= $ 3000 per year

Depreciation on Cost = Straight-line depreciation method

10
Straight line method

11
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

12
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 …..%

Net Book Value of = Cost - Accumulate depreciation


Non-current Asset (total depreciation to date)

❖same % rate is applied but it is calculated on Net Book Value - NBV each year
❖ the amount of depreciation reduces each year

13
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

Net Book Value (NBV) = Cost – Accumulated depreciation


Annual Depreciation for the year = NBV x …%

Depreciation for year ended 31 Dec 2018 = $ 22000 x 20%


(Yr 1 - 1 Jan 2018 to 31 Dec 2018) = $ 4400

Depreciation for year ended 31 Dec 2019 = ($ 22000 - $ 4400) x 20%


(Yr 2 - 1 Jan 2019 to 31 Dec 2019 ) = $ 17600 x 20%
= $ 3520
Accumulated depreciation
(year 2018 depreciation + year 2019 depreciation) = $ 4400 + $ 3520 = $ 7920

Depreciation for year ended 31 Dec 2020 = ($ 22000 - $ 7920) x 20%


(Yr 3 - 1 Jan 2019 to 31 Dec 2019) = $ 14080 x 20%
= $ 2816 14
(25000 – 10000)

[25000 – (10000 + 6000)]

[25000 – (10000 + 6000 + 3600)]

[25000 – (10000 + 6000 + 3600 + 2160)]

15
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

The amount of depreciation reduces each year

https://www.double-entry-
bookkeeping.com/depreciation/declining-
balance-method-quiz/

16
Reducing Balance Method

17
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

Assets value at the start of the year = $1000


Assets value at the end of the year = $ 800
Depreciation for the year is ($1000 - $800) $ 200

18
Example………

19
Example………
Date Transactions Amount $
Jan 3 Hand tools purchased recorded in cash book 500
Jul 15 Add Additional tools purchased during the year 80

Dec 31 Revaluation of tools at year end 480

Dec 31 Annual deprecation charge for tools 100


(580 – 480)

20
Revaluation method of depreciation

21
Session end!

22

You might also like