Depreciation of non current
assets
Non current assets
• Long life
– At least more than one year
• Not for resale purpose
– Can be disposed off
• To be used/expired/consumed in business
• Don't change frequently
Depreciation
• Depreciation is expired part of non current
assets
• Depreciation is fall in value of non current
assets due to:
1. Consumption( physical deterioration , Wear &
Tear)
2. Time factor (Assets loose value due to
passage of time )
3. Technological changes ( inadequacy ,
obsolescence)
IAS 16
On 1 November 2018, a business had following
expenditures
• Bought van for cash $60000 i.e capital expenditure
• Paid for fuel $100 i.e. revenue expenditure
Which of above expenditure would become
expense of year 2018 as a whole?
Fuel ( most probably used within 2018)
what about van, should it be taken to income
statement as expense?
yes
but how much ?
only a relevant part i.e. expired in 2018
OBJECTIVE
• TO spread / Allocate cost of non current
assets over economic life of non current
assets so that each year’s income
statement includes an expenses showing
usage of non current assets in that year.
• Depreciation is a process of allocation of
cost , not valuation.
• Depreciation is an application of matching
and prudence concept
Accounting treatment
• Matching concept
– Depreciation is expired part of non current assets
i.e. An expense so it must be matched with
revenue earned due to depreciation of non
current(as per matching concept) to get fair profit/
loss figure
– Otherwise profit will be overstated
• Prudence concept
– Depreciation is expired part of non current assets
i.e. No more an asset , so it must be deducted
from cost of non current assets , so that assets
appear at their fair valuation(as per prudence
concept) in statement of financial position
– Otherwise assets will be overstated
Depreciation is non cash item.
Depreciation is expired part of existing non
current assets , it has nothing to do with
purchase of future assets
Depreciation and Repair & Maintenance are
two separate expenses due to usage of non
current assets.
June 2017 P11 Q2
Calculation of depreciation
Note : no accurate calculation possible, so a best possible
calculation is made , using best available information
Estimated useful life / Estimated economic life
Total Expected no. of years an asset is expected to be
useful or expected time period for which business is
planning to use an asset. An asset can be used for its
whole useful life or less than that
Scrap value/Residual value
Expected sale value at the end of economic / useful
life
METHOD 1
Equal instalments straight line original cost
method method method
an equal amount Depreciation rate
is charged each is applied on cost
year through out life of
Dep asset.
years
Straight line method
This method is time based calculation , ignoring usage , so
amount of depreciation remains same irrespective of usage.
This method is appropriate for assets providing even
economic benefits over economic life e.g. building , furniture
etc.
Straight line / equal instalment method
Cost - Scrap/ residual value
estimated economic/useful life
Total Depreciation
Estimated life
= Depreciation / year
Or
Depreciation = Cost * Depreciation rate
June 2017 P11 Q3
Question
A business buys a delivery
van for $12 000. Cost - Scrap value
Its estimated useful life is four useful life
years after which its scrap
value is estimated to be $4000. 12000 - 4000
4
Depreciation is charged on the
straight line basis.
What is the annual amount of
depreciation ?
(A) $1 000
✔(B) $2 000
(C) $3 000
(D) $8 000
Question
A machine was purchased on 1
January 2010 for $12 000.
Cost - Scrap value
useful life
It has a working life of 8 years
after which it will be sold for 12000 - 2000
$2000. 8
$1250/year
Depreciation is calculated using
the straight line method.
cost 12000
What was the net book value Depreciation -1st year (1250)
at 31 December 2010?
A $10 000 Net book value 10750
B $10 500
✔C $10 750
D $12 000
Method 2
Diminishing balance method/ reducing balance / written
down value method
Depreciation is charged as a % of value at the start of
each year i.e. cost in 1st year & NBV in remaining
years.
Calculation of rate of depreciation using formula isn’t
part of syllabus i.e. rate would be given
Method 2
Maximum Depreciation is charged In 1st year &
Minimum in last year
It is time based calculation, ignoring usage, which
means a certain amount is charged as depreciation
irrespective of usage
This Method is appropriate for assets providing more
benefits in earlier years and less in later years.
Question
A motor vehicle is
cost 25000
purchased for $25 000. It
is to be depreciated on the Depreciation -1st year (5000)
diminishing(reducing)
Net book value after one year 20000
balance method at the rate
of 20 % per annum. depreciation -2nd year (4000)
NBV after two years 16000
What will be the book
value of the motor Depreciation - 3rd year (3200)
vehicle after three years?
NBV after three years 12800
A $10 000 B $12 200
C $12 800 D $15 000
Question
A machine costing $60 000 is depreciated cost 60000
by 25%per annum on the diminishing
balance method. Depreciation -1st year (15000)
What is the depreciation charge at the Net book value 45000
end of the second year ? depreciation -2nd year (11250)
(A) $11 250
(B) $15 000
(C) $26 250
(D) $30 000
June 2014 P11 Q4
✓
May 03 P1 Q11
✓
June 2004 P1 Q6
✓
June 2008 P1 Q5
✓
June 2008 P1 Q6
