Accounting for Depreciation and Disposal of NCA

Summary

Depreciation is the systematic allocation of the cost of a non-current asset over its useful economic life, ensuring accurate profit calculation and realistic asset values in financial statements. It is not a cash expense but a charge against profit.

• Depreciation — systematic allocation of an asset's cost over its useful life
  Example: A delivery van costing $20,000 is depreciated over 5 years.
• Straight-Line Method — charges equal depreciation each year
  Example: Machinery costing $50,000 with a$5,000 residual value over 5 years results in $9,000 annual depreciation.
• Reducing Balance Method — charges a fixed percentage of the asset's net book value each year
  Example: A vehicle costing $24,000 depreciated at 25% results in decreasing annual charges.
• Revaluation Method — used for assets with short useful lives, revaluing them at the end of each period
  Example: Loose tools valued at $8,000 at the start and$7,200 at the end of the year show $3,300 depreciation.
• Provision for Depreciation — a separate account showing accumulated depreciation
  Example: Keeps original asset cost visible while showing total depreciation.
• Disposal of Assets — removing an asset from records and calculating profit or loss
  Example: A vehicle sold for $15,000 with a net book value of$12,000 results in a $3,000 profit.

Exam Tips

Key Definitions to Remember

• Depreciation: Systematic allocation of an asset's cost over its useful life
• Straight-Line Method: Equal annual depreciation charge
• Reducing Balance Method: Fixed percentage depreciation on net book value
• Revaluation Method: Depreciation based on revaluation of asset value
• Provision for Depreciation: Account showing accumulated depreciation

Common Confusions

• Depreciation as a cash expense
• Confusing net book value with market value

Typical Exam Questions

• How is annual depreciation calculated using the straight-line method?
  Annual depreciation = (Cost - Residual Value) / Useful Life
• What is the impact of depreciation on profit?
  Depreciation reduces profit as it is a charge against income.
• How do you calculate profit or loss on disposal of an asset?
  Profit/Loss = Sale Proceeds - Net Book Value

What Examiners Usually Test

• Understanding of different depreciation methods
• Ability to record depreciation in ledger accounts
• Calculation of profit or loss on asset disposal