B1e. Depreciation 5 / 7

Syllabus B1e)

Compute depreciation based on the cost and revaluation models and on assets that have two or more significant parts (complex assets).


Where assets held by an enterprise have a limited useful life, it is necessary to apportion the value of an asset used in a period against the revenue it has helped to create.

Therefore, with the exception of land held on freehold or very long leasehold, every non-current asset has to be depreciated.

A charge is made in the income statement to reflect the use that is made of the asset by the business.

This charge is called depreciation.

The need to depreciate non-current assets arises from the accrual assumption.

If money is spent on an asset, then the amount must be charged against profits.

Some key terms are:

  • Depreciation

    the allocation of the depreciable amount of an asset over its estimated useful life.

  • Useful life

    the period over which a depreciable asset is expected to be used by the enterprise; or the number of production or similar units expected to be obtained from the asset by the enterprise.

  • Depreciable amount

    cost/revalued amount –less residual value

  • Residual value

    the amount the asset is expected to be sold for at the end of its useful life. It is also known as scrap value

2 Methods of Depreciation

  1. Straight line method

  2. Reducing balance method

1) Straight line method

The depreciation charge is the same every year.

  • Formula

    (Cost of asset -– residual value) / expected useful life of asset

    (Cost –- Residual value) × %

    This method is suitable for assets which are used up evenly over their useful life, e.g. fixtures and fittings in the accounts department.


A non-current asset costing $60,000 has an estimated life of 5 years and a residual value of $7,000.

(a) Calculate the annual depreciation charge.
(b) Calculate the cost, accumulated depreciation and net book value (NBV) for each year of the asset’s life.

  • a) ($60,000 - $7,000) / 5 years = $10,600 depreciation charge per year

  • b)

Year Cost Accum. Depn NBV
1 60,000 10,600 49,400
2 60,000 21,200 38,800
3 60,000 31,800 28,200
4 60,000 42,400 17,600
5 60,000 53,000 7,000

2) Reducing balance method

This method is suitable for those assets which generate more revenue in earlier years than in later years; for example machinery in a factory where productivity falls as the machine gets older.

Under this method the depreciation charge will be higher in the earlier years and reduce over time.

  • Formula:

    Depreciation rate (%) × Net Book Value (NBV)

    Net book value (NBV) = cost – - accumulated depreciation to date

    This method ignores residual value.


A business buys a lorry costing $17,000. 
After 5 years, it is expected to be sold for scrap for $2,000. 
The depreciation rate is 35% on a reducing balance basis.

Calculate depreciation expense, accumulated depreciation and net book value of the machine for these five years using the reducing balance basis.

  • Solution

Year Cost/NBV b/d Depn Rate (%) Depn Expense Accum. Depn NBV c/d
1 17,000 35% 5,950 5,950 11,050
2 11,050 35% 3,868 9,818 7,182
3 7,182 35% 2,514 12,332 4,668
4 4,668 35% 1,634 13,966 3,034
5 3,034 35% 1,062 15,028 1,972

Double-Entry for Depreciation

Depreciation has a dual effect which needs to be accounted for:

  1. It reduces the value of the asset in the statement of financial position.

  2. It is an expense in the income statement.

The double-entry for depreciation is:

  • Dr Depreciation expense (I/S)
    Cr Accumulated Depreciation (SFP)

    with the depreciation charge for the period.