6 Depreciation

Candidates should be able to:

Explain the difference between capital and revenue expenditures and receipts.

Explain the causes of depreciation and its accounting treatment as well as the principles applied in
its accounting.

Explain and select the most appropriate method of calculating depreciation and prepare the
relevant journal entries.

Prepare the schedule of non-current assets.

Prepare the journal entries for disposal and update the financial statements for deprecation.

Definitions
It is an estimated loss in the value of a non-
Depreciation
current asset over its expected useful life.

It is an estimated provision of the amount that will

Provision for Depreciation be lost in the financial year because of the use of
the non-current asset.

It is the value of the non-current asset calculated

Net book value
by deducting accumulated depreciation from cost.

This method charges a fixed percentage on the

Straight line method cost of the non-current assets. The amount of
deprecation charged each year is the same.

This method calculates depreciation by

comparing the opening and closing value of the
Reducing balance method non-current asset, and the difference represents
the depreciation. It is used for items of low
monetary value.

This method calculates depreciation by

comparing the opening and closing value of the
Revaluation method non-current asset, and the difference represents
the depreciation. It is used for items of low
monetary value.

It is the account prepared to calculate the gain or

Disposal account
loss on the sale of a non-current asset.

It is a situation in which a business exchanges its

Trade-in Allowance old asset with a new asset. The business gets an
allowance in return for the price of the new asset.

6 Depreciation 1
 6.1 Introduction to depreciation
6.1.1 Capital Expenditure and Capital Receipts
Capital Expenditure is the money spent on purchasing non-current assets as well as improving or
extending non-current assets. This includes all legal fees associated with the purchase of non-current
assets, as well as the costs of carriage for the delivery of non-current assets and their installation. In a
business's statement of financial position, these costs will appear as non-current assets. They should
not be recorded as expenses in the year of purchase because they will benefit the company for many
years.

Capital Receipts occur when money is received other than from normal trading activities. This includes
the receipt of capital from the owner, the receipt of loans and the proceeds of sale of a non-current
asset. These should not be recorded in the income statement. They affect the Statement of financial
position and are recorded in it.

6.1.2 Revenue Expenditure and Revenue Receipts

Revenue expenditure is the money spent on running a business on a day-to-day basis. This figure
includes administrative costs, selling costs, financial costs, and the cost of maintaining and operating
non-current assets. These expenses will be included in the income statement. These costs will appear
in the income statement. They are matched against the revenue of the period.

Revenue receipts refer to the money received by a company as a result of normal business operations.
These include revenue from the sale of goods, client fees, and other sources of income such as rent
and discounts. These should be recorded in the income statement because they arise from normal
trading activities.

6.1.3 What is depreciation and what are its causes?

Depreciation is an estimate of the loss in value of a non-current asset over its expected working life.
The four main causes of depreciation are physical deterioration, economic reasons, the passage of
time and depletion.

Physical deterioration:
This is the result of 'wear and tearʼ caused by the non-current asset's normal use. It could also be
because the asset has deteriorated due to rust, rot, and decay.

Economic Reasons:

6 Depreciation 2
 The non-current asset may have become insufficient because it no longer meets the business's needs
or become obsolete due to technological advancements.

Passage of time:
This arises where a non-current asset, for example, a lease, has a fixed life of a set number of years.

Depletion:
This occurs in the case of non-current assets like wells and mines. As the asset's value is depleted,
the asset's worth decreases.

6.1.4 Purpose of accounting for depreciation and the application of

relevant accounting concepts in respect of non-current assets.
The accounting for depreciation allows the cost of the non-current asset is spread over the years
which benefit from the use of that asset. There are three main accounting concepts that are applied in
the accounting for depreciation.
These are as follows:-

Consistency principle: - Whatever the method of depreciation is used it should be applied

consistently in each financial year. This allows for meaningful comparisons to be made.

Prudence principle: - Since depreciation is charged as an expense in the income statement it doesnʼt
allow the profit to be overstated. Likewise the accumulated depreciation is deducted from non-current
asset in statement of financial position and this ensures that non-current assets are not overstated and
are shown at a true and fair value. This is a direct application of the prudence principle as it states to
provide for all possible losses and not to record any possible gains.

Matching or Accruals principle: - The revenue that the asset has helped the business earn during the
year is matched with an annual charge of running the asset in the form of annual depreciation
expense. This is an application of matching principle as the costs of using the asset is matched with
the revenue earned by the use of asset.

Skill Check 1

Why is the appreciation of land not recorded in the books of accounts?

Solution

Land does not depreciate; instead it appreciates. If this was to be recorded in the books of
accounts it would contradict the prudence principle and would result in non-current assets
being overstated.

6 Depreciation 3
 Skill Check 2
The following information is available:

Details $

Delivery cost of machine 4000

Purchase cost of machine 8000

Installation cost of machine 13000

Machine fuel cost 3000

Depreciation is charged at 10% on straight

-
line basis.

Calculate the depreciation expense for the year and show an extract from income statement and
statement of financial position for 31 December 2019. All the expenses were paid in cheques.

Solution
Depreciation should be charged on the cost of the machine plus any additional expenses
incurred in bringing the machine to working condition. Therefore:

Depreciable amount = 4000 + 8000 + 13000 = $25000

Depreciation expense = 25000 × 0.1 = $2500

Statement of financial position (extract) at 31 December 2019

Accumulated
Detail Cost $ Net book value $
Depreciation $

Non-current Assets 0 0

Motor vehicles 13000 2500 10500

13000 2500 10500

Income Statement for the year ended 31 December 2019 (extract)

Detail $

Other Expenses 0

Fuel Cost 3000

Provision for depreciation 2500

5500

6 Depreciation 4
 6.1.5 What are the methods to calculate depreciation?
Straight Line Method

Reducing Balance Method

Revaluation Method

6.1.6 What are the policies to calculate depreciation?

Depreciation can be calculated on a monthly or yearly basis. This information is always mentioned in
the question.

6.1.7 Straight line method

A fixed percentage is charged on the cost of the non-current assets. The amount of depreciation
remains same each year. Under this method the depreciable amount is charged in equal instalments to
each financial period over the expected useful life of the non-current asset.
Formula:
S crap Value
Depreciation for the year = Cost − Estimated U sef ul Lif e(years)

Under this method the value of the asset can fall to nil value if there is no residual value.

Sometimes the question might only provide the depreciation percentage. Then the formula is:

Annual Depreciation = (Cost − Scrap Value) × P ercentage given

If the question has mentioned that the asset has been revalued then we calculate depreciation on the
assets remaining useful life.

6 Depreciation 5
 Skill Check 3

The following information is available:

Account name $

Fixtures purchased on 1/1/2021 25000

Residual value after 4 years 5000

Depreciation is calculated on straight line basis and the year end is 31/1/2021.

Calculate depreciation expense as an amount and percentage of the cost.

Solution

Depreciation amount =
S crap 25000−5000
Cost − U sef ul Lif e = 4 =$5000
Depreciation as a percentage of cost =
5000
25000
× 100 = 20% of cost

Skill Check 4

The following information is available:

Value of vehicles in 2015 15000

Asset Revalued in 2019 20000

The vehicles have a useful life of 10 years and are depreciated using straight line method at 10%.
Calculate the depreciation expense for 2019.

Solution

Since 4 years of the expected 10 years of the useful life have been consumed by 2019, the
remaining useful life of the asset is 6 years. The depreciation is to be calculated on the new
revalued amount with the new remaining useful life.
20000
Depreciation Expense for 2019 = 6 =$3333

6.1.8 Reducing Balance Method

A fixed percentage is charged on the Net Book Value of the non-current assets. The Net Book Value is
calculated by using the formula:

Net Book Value = Cost − Accumulated Depreciation

At the end of the first year the depreciation for that year is calculated on the cost of the asset. The
depreciation for the following year is calculated (using the same percentage) on the cost of the asset

6 Depreciation 6
 less the depreciation previously written off. The figure of cost less depreciation is known as the net
book value (or written down value) of the asset. The value of the asset can never fall to nil as the
depreciation is always calculated as a percentage of the net book value.

6 Depreciation 7
 Skill Check 5
The cost of a motor vehicle is $100000. The company charges depreciation at 30% on reducing
balance method. The vehicle is expected to last 5 years.
Show the calculation of depreciation for the 5 years and the net book values for each year.

Also prepare a provision for depreciation account with the years starting from 2015 and the
company year-end on 31 December.

Solution

Net book value at Depreciation for the Net book value at end
Year Working
start year of year

1 100000 100000 × 0.3 30000 70000

2 70000 70000 × 0.3 21000 49000

3 49000 49000 × 0.3 14700 34300

4 34300 34300 × 0.3 10290 24010

5 24010 24010 × 0.3 7203 16807

The next book value at the year-end is calculated by subtracting depreciation expense from
opening net book value.

Provision for depreciation account

Date Detail $ Date 1 Detail 1 $1

Income
31/12/2015 balance c/d 30000 31/12/2015 30000
statement

30000 30000

31/12/2016 balance c/d 51000 1/1/2016 Balance b/d 30000

Income
0 31/12/2016 21000
statement

51000 51000

31/12/2017 balance c/d 65700 1/1/2017 Balance b/d 51000

Income
0 31/12/2017 14700
statement

65700 65700

31/12/2018 balance c/d 75990 1/1/2018 Balance b/d 65700

Income
0 31/12/2018 10290
statement

75990 75990

31/12/2019 balance c/d 83193 1/1/2019 Balance b/d 75990

Income
0 31/12/2019 7203
statement

6 Depreciation 8
 Date Detail $ Date 1 Detail 1 $1

83193 83193

0 1/1/2020 Balance b/d 83193

6.1.9 Revaluation Method

The assets are valued at the end of each financial year. This value is compared with the value at the
end of the previous financial year (or with the cost if it is the first year of ownership). The amount by
which the value of the asset has fallen is the depreciation for the year.

6 Depreciation 9
 Skill Check 6
The following information is available:

Account name $

Value of loose tools at 1/1/2020 10000

Purchase of loose tools during the year 5000

Value of loose tools at 31/12/2020 13000

Calculate the depreciation charged for loose tools during the year.

Solution

Detail $

Opening value 10000

Add: Purchases 5000

Less: Closing value 13000

Depreciation of loose tools 2000

Or

Loose tools account

Date Detail $ Date 1 Detail 1 $1

Income
1/1/2020 Balance b/d 10000 31/12/2020 Statement 2000
(depreciation)

31/12/2020 Purchases 5000 31/12/2020 Balance c/d 13000

15000 15000

1/4/2022 Balance b/d 13000 0

6.1.10 How to decide which method to use?

Straight Line Method:
This method is used when it is expected that each year will benefit equally from the asset's use. As a
result, an equal charge of depreciation is applied each year to reflect the asset's use.

Premises and buildings are examples of assets that are depreciated using this method.

Reducing Balance Method:

This method is used when the asset's use will yield the greatest benefits in the early years of its life. In
the early years, assets depreciated using this method often have lower maintenance costs. This
method is frequently used for assets that quickly become obsolete as a result of technological

6 Depreciation 10
 advancements. During the first few years of their lives, these assets depreciate rapidly, then slowly
depreciate in later years. The reducing balance method perfectly reflects this, as depreciation expense
is highest in the first year and then gradually decreases in subsequent years.
Motor vehicles, machines, and equipment are examples of assets depreciated using this method.

Revaluation Method:
This method is used when keeping detailed records of certain types of non-current assets is either
impossible or impractical. The straight line and reducing balance methods of depreciation cannot be
calculated if detailed records are not available.

Loose tools, packing materials, and small pieces of equipment are examples of assets depreciated
using this method.

6.1.11 How to record depreciation in the income statement and the

statement of financial position?
The provision for depreciation is charged as an expense for the year. It appears in the other expenses
heading and is deducted from the gross profit. It reduces the profit for the year.

Detail $

Other Expenses

Provision for depreciation xx

The accumulated depreciation (the carried down balance) is deducted from the cost of the non-
current asset and is shown in the statement of financial position. It reduces the value of the non-
current assets in the financial position

Accumulated
Detail Cost $ Net Book Value $
Depreciation $

Non-Current Assets

Motor Vehicles xx (xx) xx

6.1.12 Impact on profit or loss due to depreciation method used

If a company uses the reducing balance method, its profit will increase in subsequent years as the
depreciation expense decreases over time. If the straight line method is used, the profit will be lower
because the depreciation expense will remain constant.

6.1.13 What are the advantages and disadvantages of the different

methods of depreciation?

6 Depreciation 11
 Name Advantages Disadvantages

It is useful for those non-current assets where

Reducing Balance The depreciation has to be recalculated
greater benefits are gained in the early years of
Method each year.
usage.

It is a very complex calculation and is very

It matches costs with revenue.
time-consuming.

The depreciation charge against profit is

greater in the early years.

It is necessary to estimate the useful life

Straight Line
It is relatively easy to calculate. and the residual value of the non-current
Method
asset.

It is useful when a non-current asset provides It ignores the actual rate at which the non-
equal benefit for each year of its useful life. current asset will lose value.

Revaluation It is not necessary to estimate the useful life The non-current asset has to be revalued
Method and the residual value of the non-current asset. at the end of each year.

The valuation may be based on personal

No complex calculations are required.
opinion.

6.1.14 Schedule of non-current assets format

Land and Motor
Detail Total$000
Buildings $000 Vehicles$000

Cost at 1 January 2017 xx xx xx

Additions xx (xx) xx

Revaluations xx xx xx

Disposals (xx) (xx) (xx)

Cost at 31 December 2017 xx xx xx

Accumulated Depreciation at 1 January 2017 xx xx xx

Depreciation Charge for the year xx xx xx

Revaluations (xx) (xx) (xx)

Disposals (xx) (xx) (xx)

Accumulated Depreciation at 31 December

xx xx xx
2017

Net Book Value at 31 December 2017 xx xx xx

Net Book Value at 1 January 2017 xx xx xx

The opening cost is subtracted from opening accumulated depreciation to calculate the opening net
book value.

6 Depreciation 12
 The closing cost is subtracted from closing accumulated depreciation to calculate the closing net book
value.

6.1.15 Preparing netbook value account to calculate depreciation

from missing information
Net Book Value Account

Date Detail $ Date 1 Detail 1 $1

Balance b/d
Disposals at
January 1,2021 (opening NBV xx January 1,2021 xx
NBV
of asset)

Additions or
December 31, December 31, Depreciation
purchases at xx xx
2021 2021 for the year
cost

Balance c/d
Revaluation xx (closing NBV xx
of asset)

xx xx

January 1,
Balance b/d xx
2022

The preparation of this account is useful for MCQʼs and for the incomplete records chapter.

6.1.16 Journal entries under reducing balance and straight line

method
Detail Debit $ Credit $

When purchasing a non-

current asset

Asset Account xx

Payable/ Bank Account xx

When Recording depreciation

Income Statement xx

Provision for Depreciation

xx
Account

6.1.17 Journal entries under revaluation method

6 Depreciation 13
 Detail Debit $ Credit $

When purchasing a non-

current asset

Asset Account xx

Payable/ Bank Account xx

When Recording depreciation

Income Statement xx

Asset Account xx

6.1.18 How to calculate gain or loss on disposal?

Disposal occurs when a non-current asset is sold. A disposal account is prepared to calculate the gain
or loss on disposal.
There are 2 methods of calculating gain or loss on disposal:

Preparing the disposal account

Preparing a statement to calculate gain or loss on disposal

Both of these methods are very similar and there is only a difference of presentation. In examination, it
is preferred to prepare a disposal account.

The gain on disposal should be classified as an other income in the income statement while the loss on
disposal should be classified as an other expense in the income statement.

6.1.19 Disposal Account Format

Disposal Account

Date Detail $ Date 1 Detail 1 $1

Accumulated
31/12/2021 Asset Account xx 31/12/2021 Depreciation of xx
the asset

Gain on Bank Account

disposal or Asset
31/12/2021 (transferred to xx 31/12/2021 Account xx
income Exchange
statement) value)

Loss on
disposal
31/12/2021 (transferred to xx
income
statement)

xx xx

6 Depreciation 14
 If there are any disposal costs they should be deducted from the gain on disposal or added to the loss
on disposal.

6.1.20 Disposal Statement Format

Detail $ $1

Sales proceeds from disposal xx

Less: Disposal cost (xx)

xx

Asset at cost xx

Less: Accumulated
(xx)
depreciation

Net Book Value (xx)

Gain or Loss) on disposal xx/(xx)

The gain or loss on disposal can be calculated by the formula:

Sales proceeds − Net book value = Gain or (Loss) on disposal

6.1.21 Journal entries to record disposal

Detail Debit $ Credit $

Transfer of non-current asset

to disposal account

Disposal Account xx

Asset Account xx

Transfer of accumulated
depreciation of that asset to
disposal account

Accumulated Depreciation
xx
Account

Disposal Account xx

Recording cash received from

sale

Cash/Bank xx

Disposal Account xx

Recording exchange of the

asset instead of cash

Asset Account (exchange

xx
value)

6 Depreciation 15
 Detail Debit $ Credit $

Disposal Account xx

Transferring the profit or loss to

the income statement

Disposal Account xx

Income Statement (profit) xx

Income Statement (loss) xx

Disposal Account xx

Skill Check 7

The following information is available:

Detail $

Cost of Motor vehicles 75000

Accumulated depreciation of motor vehicles 51000

Sales proceeds from motor vehicles 18000

Disposal costs 500

Calculate the gain or loss on disposal using the statement format.

Solution

Details $ $1

Sales proceeds from disposal 18000

Less: Disposal costs 500

17500

Vehicles at cost 75000

Less: Accumulated
51000
depreciation

Net Book Value 24000

Loss on disposal 6500

6 Depreciation 16
 Skill Check 8

Mr. X has several motor vehicles and the following information is available:

Detail $

Cost of Motor vehicles at 1 January 2021 200000

Accumulated depreciation of motor

80000
vehicles at 1 January 2021

Motor Vehicle purchased on 2 January

50000
2021

The car dealer had accepted a car owned by Mr. X in part exchange for the motor vehicle
purchased on 2 January. The part exchange value of the old car was $4000. This car had
originally cost $30000 and had an accumulated depreciation of $25000.
a) Calculate the gain or loss on disposal.
b) Prepare the motor vehicles account, bank account, disposal account and the accumulated
depreciation account.

Solution
Answer A
Statement to calculate gain or loss on disposal

Details $ $1

Disposal proceeds
4000
(exchange value)

Less: Disposal costs 0

4000

Vehicles at cost 30000

Less: Accumulated
25000
depreciation

Net Book Value 5000

Loss on disposal 1000

Answer B

Disposal Account

Date Detail $ Date 1 Detail 1 $1

February 1, February 1, Accumulated

Motor Vehicle 30000 25000
2021 2021 Depreciation

Motor Vehicle-
February 1,
0 Exchange 4000
2021
Value

6 Depreciation 17
 Date Detail $ Date 1 Detail 1 $1

February 1, Loss on
0 1000
2021 disposal

30000 30000

Motor Vehicle Account

Date Detail $ Date 1 Detail 1 $1

February 1, Disposal
January 1, 2021 Balance b/d 200000 30000
2021 Account

February 1, Disposal
50000 February Balance c/d 220000
2021 Account-4000.

Bank 50000
0 0
400046000

250000 250000

February 1,
Balance b/d 220000 0
2021

Accumulated Depreciation Account

Date Detail $ Date 1 Detail 1 $1

February 1, Disposal
25000 January 1, 2021 Balance c/d 80000
2021 Account

February 1,
Balance c/d 55000 0
2021

80000 80000

February 1,
0 Balance c/d 80000
2021

Bank Account

Date Detail $ Date 1 Detail 1 $1

Motor Vehicle
February 1, Amount paid
46000
2021 for the new
vehicle)

6 Depreciation 18
 Skill Check 9
The following information is available for Company XYZ.

Detail $

Cost of Motor vehicles at 1 January 2021 5000

Accumulated depreciation of motor vehicles

2500
at 1 January 2021

Motor Vehicle purchased on 2 January 2021 6000

Trade-in allowance 1000

The Company XYZ was using a delivery van since 2015, purchased at $5000. Now it has decided
to replace it with a new delivery van. The supplier agreed to give an allowance of $1000 on the old
delivery van at the total price of $6000. The accumulated depreciation for the asset to date was
$2500.
Required:
A Calculate the gain or loss on disposal.
B. Prepare the delivery van account.

Solution
Answer A

Disposal Account

Date Detail $ Date Detail $

Accumulated
2/1/2021 Delivery Van 5000 2/1/2021 2500
Depreciation

Delivery Van -
2/1/2021 Trade-in 1000
allowance

Loss on
2/1/2021 1500
disposal

5000 5000

Answer B
Delivery Van Account

Date Detail $ Date Detail $

Disposal
1/1/2021 Balance b/d 5000 2/1/2021 5000
Account

2/1/2021 Bank 5000 2/1/2021 Balance c/d 6000

Trade-in
2/1/2021 1000
allowance

6 Depreciation 19
 Date Detail $ Date Detail $

11000 11000

2/1/2021 Balance b/d 6000

6 Depreciation 20
 Skill Check 10

A The following information is available for X Limited:

Account name $

Fixtures at cost on 1/1/2021 25000

Fixtures purchased on 1/6/2021 5000

Fixtures sold on 1/9/2021 7000

Accumulated depreciation on 1/1/2021 12000

The company policy is to charge depreciation using straight line method at 10% on a monthly
basis. The company year-end is on 31 December.

The fixture that was sold had cost $10000 and had an accumulated depreciation of $5000.
Required:

a Prepare the fixtures account.

b Calculate the gain or loss on disposal.

c Calculate the depreciation expense for the year.

d Prepare the accumulated depreciation account.

e Prepare an extract from the income statement and the statement of financial position showing
the impact of these transactions.

Solution
Answer a)

Fixtures Account

Date Detail $ Date 1 Detail 1 $1

January 9,
January 1, 2021 Balance b/d 25000 Disposal 10000
2021

January 6, December 31,

Bank 5000 Balance c/d 20000
2021 2021

30000 30000

January 1,
Balance b/d 20000 0
2022

Answer b)
Disposal Account

Date Detail $ Date 1 Detail 1 $1

January 9, Accumulated
January 1, 2021 Fixtures 10000 5000
2021 Depreciation

6 Depreciation 21
 Date Detail $ Date 1 Detail 1 $1

Gain on January 9,
January 1, 2021 2000 Bank 7000
disposal 2021

12000 12000

Answer c)

Detail Calculation $

Depreciation on disposed 8
10000 × 12 × 0.1 667
fixtures

Depreciation on the new 5

12 × 5000 × 0.1 208
purchased fixtures

Depreciation of the unchanged

15000 x 0.1 1500
fixtures

Total depreciation for the year 1500  208  667 2375

Answer d)
Provision for depreciation Account

Date Detail $ Date 1 Detail 1 $1

January 1, January 1,
Disposal 5000 Balance b/d 12000
2021 2021

Income
Balance c/d 9375 2375
statement

14375 14375

0 Blance b/d 9375

Answer e)
X Limited
Extract from income statement for the year ended 31 December 2021

Detail $

Other Incomes

Gain on Disposal 2000

Other Expenses

Provision for Depreciation 2375

375

X Limited

6 Depreciation 22
 Statement of financial position (extract) at 31 December 2021

Detail Cost $ Accumulated Depreciation Net book Value $

Non-Current Assets 0 0

Fixtures 20000 9375 10625

20000 9375 10625

6 Depreciation 23
 Skill Check 11

The following information is available for X Limited:

Account name $

Fixtures at cost on 1/1/2021 25000

Fixtures purchased on 1/6/2021 5000

Fixtures sold on 1/9/2021 7000

Accumulated depreciation on 1/1/2021 12000

The company policy is to charge depreciation using straight line method at 10% on a monthly
basis. The company year-end is on 31 December.

The fixture that was sold had cost $10000 and had an accumulated depreciation of $5000.
Redo Skill Check 10 but this time the company policy is to charge depreciation using straight line
method at 10% on a yearly basis with no depreciation charged in the year of disposal.

Solution
Answer a)

Fixtures Account

Date Detail $ Date 1 Detail 1 $1

January 1 , January 9,
Balance b/d 25000 Disposal 10000
2021 2021

January 6, December 31,

Bank 5000 Balance c/d 20000
2021 2021

30000 30000

January 1,
Balance b/d 20000 0
2022

Answer b)
Disposal Account

Date Detail $ Date 1 Detail 1 $1

January 9, Accumulated
January 1, 2021 Fixture 10000 5000
2021 Depreciation

Gain on January 9,
January 1, 2021 2000 Bank 7000
Disposal 2021

12000 12000

Answer c)

6 Depreciation 24
 Detail Calculation $

Depreciation on the closing

20000  0.1 2000
balance of fixtures

Total depreciation for the year 2000 2000

Answer d)
Provision for depreciation Account

Date Detail $ Date 1 Detail 1 $1

January 1, 2021 Disposal 5000 January 1, 2021 Balance b/d 12000

December 31, Income

Balance c/d 9000 2000
2021 Statement

14000 14000

0 Balance b/d 9000

Answer e)

X Limited
Extract from income statement for the year ended 31 December 2021

Detail $

Other Incomes

Gain on Disposal 2000

Other Expenses

Provision for Depreciation 2000

Nil

X Limited
Statement of financial position (extract) at 31 December 2021

Accumulated
Detail Cost $ Net Book Value $
Depreciation $

Non-Current Assets 0 0

Fixtures 20000 9000 11000

20000 9000 11000

6 Depreciation 25
 Points to Note
This chapter is extremely important and is a core chapter for all the other chapters. Make sure you
are confident in solving questions about depreciation.

Remember if an asset has been revalued then the depreciation is calculated on the revalued
amount on the assets remaining useful life.

Disposal is a capital receipt.

If a non-current asset has any legal fees or installation costs incurred along with its purchase then
depreciation is calculated on the sum total of the cost and the installation and legal fees.

Depreciation can be calculated yearly or monthly.

If depreciation is charged monthly then it is very important to account for the months of ownership.

Remember to update the income statement and the statement of financial position for depreciation.

6 Depreciation 26