Edexcel IGCSE Accounting Depreciation PDF

Head to www.savemyexams.com for more awesome resources Edexcel IGCSE Accounting: Your notes Introduction to Bookkeeping & Accounting Depreciation Contents Causes of Depreciation Methods of Depreciation Provision for...

Head to www.savemyexams.com for more awesome resources Edexcel IGCSE Accounting: Your notes Introduction to Bookkeeping & Accounting Depreciation Contents Causes of Depreciation Methods of Depreciation Provision for Depreciation Disposal of Non-Current Assets Page 1 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Causes of Depreciation Your notes Introduction to Depreciation What is depreciation? Depreciation is applied to non-current assets to represent the reduction in their value Depreciation is the financial measure of how the value of an asset decreases over time Depreciation is an expense that accounts for the estimated loss in value of an asset during a given period It is an expense that does not involve spending money It is used to spread the cost of the assets over their expected useful life You need to know two methods to calculate depreciation Straight line method Reducing balance method The accounting concept of consistency states that when a business chooses a method of depreciation for a type of non-current asset, it must use that method each year unless there is a valid reason to change to a different method Different methods can be used for different types of non-current assets Why are non-current assets depreciated? Depreciation is used so that the business adheres to the following accounting concepts: Accruals The capital expenditure of a non-current asset is matched against the income that it has contributed to Suppose that a business buys a vehicle for $30 000 and expects it to be useful for 8 years The full $30 000 should not be charged as an expense straightaway Instead, the expense should be spread out over the 8 years that it is contributing to income Prudence The value of the assets should not be overstated Depreciation allows the business to report a more realistic estimation for the valuation of its assets Page 2 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Is depreciation charged in the years of purchase and sale? Different businesses will have different policies for dealing with depreciation for the year in which the Your notes asset is purchased and the year in which the asset is sold or disposed of The business could: Charge a full year’s worth of depreciation Charge no depreciation Charge a proportion of the full year’s worth of depreciation The exam question will specify which rules should be used Causes of Depreciation What are the causes of depreciation? The value of a non-current asset depreciates due to: Wear and tear of the asset The asset becoming outdated or obsolete The reduction in the expected useful lifetime of the asset The asset being used up or depleted Cause Explanation Wear and tear The non-current asset might deteriorate which causes it to be less useful. This could be due to excessive use or physical deterioration such as rust. For example, a vehicle might have scratches which lowers its value. Obsolescence The non-current asset might lose value as technology advances. The non-current might become inadequate for the growing needs of the business. For example, a computer might become obsolete when a newer model is released. Passage of The non-current asset might have a fixed number of years. For example, a vehicle might time be leased for five years. Depletion The non-current asset might be used up so that there is nothing left. For example, the business might have natural resources such as oil which will eventually be used up. Page 3 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Methods of Depreciation Your notes Straight Line Depreciation What is the straight line method of depreciation? The straight line method of depreciation assumes that a non-current asset loses value at a constant rate over its useful life This means that the expense for its depreciation is the same each year The carrying value can reach $0 This is when the asset is fully depreciated You could be given the depreciation rate as a percentage of its original value E.g. depreciation could be charged at 20% of its original cost Or you could be expected to calculate the depreciation using: The number of years that the non-current asset will be used The expected value of the non-current asset at the end of its working life This value could be $0 The expected value is also called the residual value or the disposal value This method is usually used when the asset will be equally valuable for each year of its use For example, fixtures and fittings, equipment, etc Page 4 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes Example of an asset which cost $20 000, being charged depreciation at 15% per annum using the straight line method How do I calculate depreciation using the straight line method? If you are given the percentage for the depreciation Find the percentage of the original amount This will be the yearly depreciation charge If you are not given the percentage Calculate the expected loss in value during the expected life of the non-current asset The original value minus the expected value at the end of its life Divide the loss by the number of years it will be used This will be the yearly depreciation charge original value − expected value Depreciation = number of years Page 5 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Examiner Tips and Tricks Your notes The straight line method is similar to simple interest calculations used in maths. Worked Example Abi purchases machinery for $18 000. Machinery is depreciated at 15% per annum using the straight line method. Calculate the carrying value of the machinery after 3 years. Answer Calculate the yearly expense due to depreciation 15% ✕ $18 000 = $2 700 Calculate the total depreciation after 3 years 3 ✕ $2 700 = $8 100 Subtract the depreciation from the original value $18 000 - $8 100 = $9 900 Worked Example Taiki purchases a vehicle for $30 000. He expects to use the vehicle for 3 years, after which he estimates that it will have a value of $12 000. Calculate the yearly expense due to the depreciation of the vehicle. Answer Calculate the loss in value over the 3 years $30 000 - $12 000 = $18 000 Divide this by the number of years $18 000 ÷ 3 = $6 000 Reducing Balance Depreciation Page 6 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources What is the reducing balance method of depreciation? The reducing balance method of depreciation assumes that the non-current asset loses value at a Your notes rate proportional to its current value This means that the expense for its depreciation gets smaller each year as the current value decreases You will be told the percentage of the current value to use for depreciation This method is usually used when a non-current asset initially loses value at a fast rate Example of an asset, which cost $20 000, being charged depreciation at 30% per annum using the reducing balance method How do I calculate depreciation using the reducing balance method? Find the percentage of the current carrying value This will be the depreciation charge for that year If you need to calculate the depreciation for multiple years, then calculate one year at a time Find the depreciation charge for one year using the carrying value at that start of the year Subtract this amount from the carrying value at the start of the year to find the new carrying value Page 7 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Find the depreciation charge for the next year using the carrying value at the start of that year Continue this process Your notes If you just need to find the current carrying value then you can use some maths skills Subtract the percentage from 100% Write this as a decimal Raise this to the power of the number of years Multiply this by the original value Examiner Tips and Tricks The reducing balance method is similar to compound interest calculations used in maths. Amounts should always be given to the nearest dollar in exams. Worked Example Abi purchases a vehicle for $16 000. Machinery is depreciated at 25% per annum using the reducing balance method. Calculate the carrying value of the machinery after 3 years. Answer Find the depreciation charged in each year by finding the percentage of the carrying value at that time. Subtract that year’s depreciation from the carrying value to find the carrying value at the end of the year. End of year Depreciation charge Carrying value 0 - $16 000 1 25% ✕ $16 000 = $4 000 $16 000 - $4 000 = $12 000 2 25% ✕ $12 000 = $3 000 $12 000 - $3 000 = $9 000 3 25% ✕ $9 000 = $2 250 $9 000 - $2 250 = $6 750 Alternatively: Page 8 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Subtract the percentage from 100% 100% - 25% = 75% Your notes Write this as a decimal 75% = 0.75 Raise this to the power of the number of years 0.753 Multiply this by the original value $16 000 ✕ 0.753 = $6 750 Page 9 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Provision for Depreciation Your notes Provision for Depreciation What is a provision for depreciation account? A provision for depreciation account for a non-current asset is used to record the depreciation for that asset It is important for a business to keep a record of both the following amounts: The original cost of the non-current asset The carrying value of the non-current asset Therefore, a business will use two accounts for each type of non-current asset: The non-current asset (at cost) account Entries are only made in this account when non-current assets are purchased, sold or otherwise disposed of The provision for depreciation of the non-current asset account Depreciation charges are recorded here each year The carrying value can be found by subtracting the balance of the provision for depreciation account from the balance of the non-current asset account How do I record depreciation in the ledger accounts? No entries are made in the non-current asset account for depreciation The book of original entry for depreciation is the journal To record the yearly depreciation at the end of the financial year: Debit the income statement This is because depreciation for the year is an expense Credit the provision for depreciation account You can then balance the provision for depreciation account The closing balance will be the accumulated depreciation of the non-current asset Not just the yearly charge Page 10 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The opening balance will be brought down on the credit side How do I record depreciation in the financial statements? Your notes The income statement only shows the depreciation charge for that financial year This is listed under the expenses This is the same amount as the credit entry made to the provision for depreciation account The statement of financial position shows three values labelled as: Cost This is the original cost of the non-current asset This is the debit balance in the non-current asset account Accumulated depreciation This is the total depreciation of the asset This is the credit balance in the provision for depreciation account This is the balance after the year’s depreciation has been entered Carrying value This is the difference between the cost value and the provision for depreciation value Examiner Tips and Tricks It can help to think of the provision for depreciation account as a copy of the non-current asset account. This helps to understand why the entry is on the credit side, as it is reducing the value of an asset. Be very careful that you only enter the amount of depreciation for that year, not the total depreciation to date. Worked Example Katrina is a sole trader. Katrina charges depreciation at 20% per annum using the reducing balance method. Below are balances at 1 March 2023. Page 11 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources $ Equipment 20 000 Your notes Provision for depreciation on equipment 4 000 Katrina also purchased additional equipment on 1 December 2023 for $5 000 by bank transfer. Katrina charges a full year’s depreciation in the year the equipment is purchased. Prepare Katrina’s equipment account and provision for depreciation on equipment account for the year ended 29 February 2024. Balance the accounts at 29 February 2024 and bring down the balances at 1 March 2024. Answer Start with the equipment account. Enter the balance of $20 000 as the opening balance on the debit side as it is an asset account Enter the $5 000 for the additional equipment on the debit side Do not enter any depreciation Balance the account and bring down the new balance Katrina Equipment Account Date Details $ Date Details $ 2023 2024 Mar 1 Balance b/d 20 000 Feb 29 Balance c/d 25 000 Dec 1 Bank 5 000 25 000 25 000 2024 Mar 1 Balance b/d 25 000 Next complete the provision for depreciation account. Enter the balance of $4 000 on the credit side as it is the reduction of an asset The equipment can be combined as a full year’s worth of depreciation is charged on the new equipment Find the total cost of the equipment $20 000 + $5 000 = $25 000 Subtract the provision for depreciation to find the carrying value before charging that year’s depreciation Page 12 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources $25 000 - $4 000 = $21 000 Find 20% of the carrying value to calculate the depreciation charge Your notes 20% ✕ $21 000 = $4 200 Enter this on the credit side of the provision for depreciation account with the label “income statement” Balance the account and bring down the new balance Katrina Provision for Depreciation on Equipment Account Date Details $ Date Details $ 2024 2023 Feb 29 Balance c/d 8 200 Mar 1 Balance b/d 4 000 2024 Feb 29 Income Statement 4 200 8 200 8 200 2024 Mar 1 Balance b/d 8 200 Page 13 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Disposal of Non-Current Assets Your notes Profit or Loss on a Sale of a Non-Current Asset Can a business sell a non-current asset? A non-current asset can be sold when the business no longer needs it This is referred to as the disposal of a non-current asset The sale of the non-current asset could be a cash sale or credit sale If it is a credit sale then a nomial ledger account is created for the person or business buying the asset This account is referred to as an other receivables account to avoid confusion with trade receivables accounts The money received from the sale is called the proceeds of the sale This is a capital receipt A non-current asset can also be used as a part-exchange for a new non-current asset The business and the supplier of the new asset will agree on the value of the old asset The business will give the old asset to the supplier The supplier will reduce the cost of the new asset by the value of the old asset Examiner Tips and Tricks Do not include the sale of a non-current asset in the sales account! The sales account is just for the sale of goods. The sale of a non-current asset will be detailed in a disposal account. How do I calculate the profit or loss on a sale of a non-current asset? STEP 1 Calculate the carrying value of the non-current asset The cost of the asset minus the accumulated depreciation Page 14 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources STEP 2 Calculate the difference between the proceeds of the sale and the carrying value Your notes STEP 3 Determine if a profit or loss has been made If the proceeds of the sale are greater than the carrying value then it is a profit This means too much depreciation has been charged If the proceeds of the sale are smaller than the carrying value then it is a loss This means not enough depreciation has been charged Examiner Tips and Tricks Check whether the question says there is a depreciation charge for the non-current asset in the year of sale. If there is then calculate that year’s depreciation and include it in the provision for depreciation account before working out the carrying value. Worked Example Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges depreciation at 20% per annum using the straight line method. Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in the year the equipment is purchased and none in the year it is sold. Calculate the gain or loss on disposal of the equipment. Answer STEP 1 - Calculate the carrying value Calculate the yearly depreciation charge 20% ✕ $30 000 = $6 000 Calculate the accumulated depreciation Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023 No depreciation is charged in the year of sale 3 ✕ $6 000 = $18 000 Calculate the carrying value Page 15 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources $30 000 - $18 000 = $12 000 STEP 2 - Calculate the difference between the sale proceeds and the carrying value Your notes $13 000 - $12 000 = $1 000 STEP 3 - The sale proceeds are higher than the carrying value therefore it is a profit Profit of $1 000 Disposal Account What is a disposal account? A disposal account is used to show the calculation of the profit or loss on a sale of a non-current asset The profit or loss is transferred to the income statement The account will then have a zero balance How do I record the sale of a non-current asset in the ledger accounts? The book of original entry is the journal Deal with each transaction one at a time STEP 1 Reduce the non-current asset account by the original value Credit the non-current asset account Because the value of the assets is decreasing Debit the disposal account STEP 2 Reduce the provision of depreciation account by the accumulated depreciation of the non-current asset Debit the provision for depreciation account Credit the disposal account STEP 3 Increase the cash, bank or other receivables account Debit the relevant asset account Cash, if received Bank, if money is received by cheque or bank transfer Page 16 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Other receivables account if it was sold on credit Credit the disposal account STEP 4 Your notes Include the profit or loss of the sale If a profit is made, then this is an income for the business Credit the income statement Debit the disposal account If a loss is made, then this is an expense to the business Debit the income statement Credit the disposal account The layout of a disposal account Examiner Tips and Tricks The disposals account should balance. If it does not balance, then check for any mistakes. Some students calculate the profit or loss by completing steps 1 to 3 and then finding the amount needed to balance the disposal account. If you use this method, be extra careful that you put the entries on the correct side. Page 17 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Worked Example Your notes Riz owes an embroidery business and owns machinery. Riz purchased an additional machine on 1 March 2022 for $30 000. Riz depreciates machinery using the straight line method using the assumption that machinery fully depreciates after five years. Riz charges depreciation at the end of each month. Riz sells this additional machinery on 31 December 2023 and receives a cheque for $17 500. No other non-current assets were sold in the financial year ending 29 February 2024. Prepare the disposal account for machinery for the year ended 29 February 2024. Answer Calculate the yearly depreciation charge $30 000 ÷ 5 = $6 000 Calculate the monthly depreciation charge $6 000 ÷ 12 = $500 Calculate the number of months that Riz owned the machinery 1 March 2022 to 31 December 2023 is 22 months. Calculate the accumulated depreciation of the machinery 22 ✕ $500 = $11 000 Calculate the carrying value at 31 December 2023 $30 000 - $11 000 = $19 000 Calculate the loss on the sale $19 000 - $17 500 = $1 500 The sale proceeds are less than the carrying value so it was a loss Fill in the disposal account 1. Enter the original cost on the debit side 2. Enter the accumulated depreciation on the credit side 3. Enter the sale proceeds on the credit side 4. Enter the loss on the credit side Riz Disposal Account Date Details $ Date Details $ 2023 2023 Dec 31 Machinery 30 000 Dec 31 Provision for depreciation 11 000 Dec 31 Bank 17 500 Page 18 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2024 Feb 29 Income statement 1 500 Your notes 30 000 30 000 Page 19 of 19 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers