Depreciation Cambridge IGCSE Accounting revision
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In plain words
A van bought for $20 000 is not worth $20 000 five years later. It has been used, and that use helped to earn five years of income. Depreciation spreads the cost of an asset over the years that benefit from it.
6 things to know
- Depreciation is an estimate of the loss in value of a non-current asset over its useful life. Its causes are wear and tear, obsolescence (becoming out of date), the passage of time and depletion.
- It is charged so that each year bears a fair share of the asset's cost (the matching concept), and so that assets and profit are not overstated (prudence).
- Straight-line method: the same amount every year. Annual depreciation = (cost − residual value) ÷ years of useful life, or a fixed percentage of cost. It suits assets that are used evenly, such as fixtures and fittings.
- Reducing balance method: a fixed percentage of the net book value. The charge is highest in the first year and falls each year. It suits assets that lose most value early, such as vehicles and computers.
- Revaluation method: depreciation = value at the start + purchases in the year − value at the end. It suits small items that are hard to track one by one, such as loose tools.
- Entries each year: debit the statement of profit or loss, credit the provision for depreciation account. The statement of financial position shows cost, less accumulated depreciation, which gives the net book value.
Worked example
A machine costs $12 000. Calculate the depreciation for each of the first two years, by the straight-line method (residual value $2000, life 5 years) and by the reducing balance method at 25%.
- Straight-line: (12 000 − 2000) ÷ 5 = $2000 a year. Year 1: 2000. Year 2: 2000.
- Reducing balance, year 1: 25% of 12 000 = $3000. Net book value is now 9000.
- Reducing balance, year 2: 25% of 9000 = $2250. Net book value is now 6750.
Tips and tricks
- Reducing balance takes the percentage of the net book value, not of the cost. That is why the charge falls every year.
- Depreciation is not a store of cash. No money is set aside. It is an expense that reduces profit and the book value of the asset.
It lands in your notebook with its questions as flashcards.
Depreciation: 6 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What is depreciation?
It spreads the cost over the years the asset is used.
Equipment costs $10 000, with a residual value of $1000 and a life of 6 years. What is the annual straight-line depreciation?
(10 000 − 1000) ÷ 6.
A van costs $20 000 and is depreciated at 30% by the reducing balance method. What is the charge in year 2?
Year 1 is 6000, leaving 14 000. 30% of 14 000 is 4200.
Which method gives the same charge every year?
A fixed amount, based on cost.
Which asset is most suited to the revaluation method?
Small items are valued in total at the start and end of the year.
Which concept is applied when depreciation is charged?
The cost is matched to the years that benefit from the asset.
Quiz
6 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 7 marks. Write your answers on paper, then check them.
Depreciation
Cambridge IGCSE Accounting 0452 · 7 marks · papermunch.org
Name ______________________________ Date ______________
State two causes of depreciation.[2]
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Wear and tear, and obsolescence. (Also: the passage of time, and depletion.)
A vehicle costing $16 000 is depreciated at 20% a year by the reducing balance method. Calculate its net book value after two years.[3]
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$10 240. Year 1: 3200, leaving 12 800. Year 2: 20% of 12 800 = 2560, leaving 10 240.
Tools were valued at $1400 at the start of the year. Tools costing $600 were bought, and at the end of the year the tools were valued at $1650. Calculate the depreciation for the year.[2]
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$350. 1400 + 600 − 1650.
Answers: Depreciation
- 1. Wear and tear, and obsolescence. (Also: the passage of time, and depletion.)
- 2. $10 240. Year 1: 3200, leaving 12 800. Year 2: 20% of 12 800 = 2560, leaving 10 240.
- 3. $350. 1400 + 600 − 1650.