5 TO BEGIN

1 Make a list of non current assets Which assets can loose their value

2
with the passage of time/

3
4
Current learning
What is meant by depreciation
Which two concepts are applied

5 when calculating depreciation?

 5 TO BEGIN
1 IT equipment, fixtures and fittings, motor
vehicle.
Some assets suffer from wear and tear or
go out-of-date more quickly than others.

2
3
4
Prudence, consistency

5
Driving Question

Which type of non current assests increase in value in future?

@ASPSDubai
Topic: Depreciation
LO: To understand causes of depreciation

Success Criteria:
● Identify causes of depreciation.
● Describe the different methods of calculating depreciation
● Calculate depreciation using various methods
● To analyse the impact of depreciation on financial statements.
 History and Statement

Depreciation & Disposal of Fixed Assets

Depreciation is part of the original cost of a fixed asset consumed during its period if use by the business.
Depreciation is an “EXPENSE”. It will have to be charged to the Profit and Loss Account in the same way as
expenses such as wages, rent, insurance etc. and will therefore reduce Profit.
Causes of Depreciation
Fixed assets such as machinery, motor vehicle, plant and equipment etc. tend to fall in value (depreciate) for
various reasons. These are given
Physical depreciation
1. Wear and tear
2. Erosion, rust, rot and decay – Land may be eroded or wasted away by the action of wind rain, sun or the
other elements of nature. Similarly, the metals in motor vehicles or machinery will rust away. Wood will
rot eventually. Decay is process which be present to the elements of nature and lack of proper attention.
 Economic factors

Economic factors may be said to the reasons for an asset being put out of use even though it is in
good physical condition. The two main factors are usually obsolescence and inadequacy.
1. Obsolescence: This occurs when an asset becomes out of date due to advanced technology or
a change in processes. For example, in the car industry much of the assembly work is now done
by robots
2. Inadequacy: This arises when an asset is no longer used because of the growth and change in
the size of the business due to new regulations.
3. Time factor: There are some assets that have a legal life fixed in terms of years. E.g. lease
4. Depletion: There are some assets are of a wasting nature such as the extraction of raw
materials from mines or quarries or oil from wells. To provide for the consumption of an asset
of a wasting character is called provision for depletion.
 Methods of calculating depreciation charges

The two main methods in use for calculating depreciation charges are:
1. Straight Line method
2. Reducing balance method or Diminishing Balance method
Straight line method
The method involves
3. Cost price of an asset 𝐶𝑜𝑠𝑡𝑝𝑟𝑖𝑐𝑒−𝑆𝑐𝑟𝑎𝑝𝑣𝑎𝑙𝑢𝑒
4. Estimated years of its use 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐h𝑎𝑟𝑔𝑒𝑝𝑒𝑟 𝑦𝑒𝑎𝑟=
5. Expected disposal value
𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓 𝑦𝑒𝑎𝑟𝑠𝑜𝑓 𝑢𝑠𝑒
e.g. If a car was purchased for $22000 and the business decided to keep it for four years and
then sell it for $2000, the depreciation to be charged would be:
= $5000 depreciation per year
 Reducing Balance Method

Depreciation to be charged involves deciding on a percentage amount to be used each year. This
percentage is then deducted from the cost price for the first year and in subsequent years from the
reducing balances.
*Reducing Balance Method is a depreciation calculation which is based on the net book value of the
asset brought forward from the previous year. Therefore, the depreciation charge falls each year.
*Net Book Value (NBV): The cost of the asset less depreciation charges to date, also known as “book
value”.

$
e.g. Cost 10,000
First year: Depreciation(20% of $10000) (2000)
If a machine is brought for $10,000 and
NBV 8000
depreciation is to be charged at 20%, the
Second Year: Depreciation (20% of $8000) (1600)
calculations for the first three years would be
NBV 6400
as follows:
Third year: Depreciation (20% of $6400) (1280)
Net book value at the end of the third year 5120
 DISPOSAL OF A FIXED ASSET

Recording purchase of a Fixed Asset

Debit – Asset Account
Credit – Bank Account (if paid) Disposal account
Asset Provision for depreciation
xxx
Recording Depreciation Charges xxx
Debit – Profit and Loss account Cash
Credit – Provision for depreciation
account
I/S (loss)
Or I/S (profit) xxx
Debit - Depreciation xxx

Credit – Provision for depreciation

________
account
________

________
Teach and model - Pg 91
Teach and model
Teach and model
Recording depreciation using double entry principle
Mid - Plenary
 Applications
Hunter started in business on 1 April 2018. On that date he purchased Machine A for $26 000 and on 1 December 2018 he purchased
Machine B for $16 000.

Depreciation is charged at 10% per annum using the reducing balance method.

A full year's depreciation is charged in the year of purchase and none in the year of disposal.

On 1 January 2020 Hunter sold Machine A for $18 000

Calculate the profit or loss on the disposal of Machine A.

(Total for question = 2 marks)

(Q18d 4AC1/01, Nov 2021)
 LO: To develop fluency in balancing equations and using inverse
operations.
Assessment Criteria including WAGOLL Exemplars

Good Very Good Excellent

I am able to describe the different methods of I am able to calculate depreciation Using I am able to analyse the impact of
calculating depreciation. various methods. depreciation on financial statements.
Group 3
Motor Vehicle Disposal Account
On 1 April 2018 Rafiq purchased a motor vehicle at a
cost of $48 000

On 1 December 2020 Rafiq sold the motor vehicle to

Bilal for $28 000. One half of the sale proceeds were
received by bank transfer on that date and the balance
was to be paid on 30 June 2021.

Depreciation is charged at 20% per annum using the

reducing balance method. A full year's depreciation is
charged in the year of purchase and none in the year of
disposal.

Rafiq prepares financial statements to 31 January.

Calculate the carrying value of the motor vehicle at 1

December 2020.

Prepare the motor vehicle disposal account.

(Total for question = 8 marks)
(QU18d 4AC1/01, June 2021)
Group 4

Question 18 (c,d & e)

Answer key

Question 18

Answer key
Group 5

Q17 Depreciation past paper

Answer key

Question 17

Answer key

Question 17 (c)

Answer key
 Challenge
(i) On 1 January 2022 the balance on the motor vehicles cost account was $76 600

On 1 March 2022 a motor vehicle was sold for $12 000, payment being received by cheque. This motor vehicle was originally purchased on 1
January 2020 for $18 000

On 1 June 2022 a new motor vehicle was purchased costing $21 500, paid for by cheque.

Motor vehicles are depreciated at 25% per annum using the reducing balance method. A full year's depreciation is charged in the year of
purchase but none in the year of disposal.

Prepare the following accounts for the year ended 31 December 2022.
Challenge

(Total for question = 13 marks)

(Q18bc 4AC1/01, Nov 2023)
Self Assessment- Task
Arianna is considering investing in a computerised accounting system to help with her business.

Explain two advantages and two disadvantages for Arianna of this proposal.
(Total for question = 8 marks)
(Q17d 4AC1/01, SAM 0)

Self Assessment - Challenge

Explain, referring to an accounting concept, one reason why it is necessary for a business to
account for depreciation on its non-current assets.
(Total for question = 2 marks)
(QU18d 4AC1/01, June 2024)
Plenary