Depreciation

At year-end, the bookkeeper passes the depreciation journal for each class of non-current asset:

• Dr Depreciation Expense (income statement) £X
• Cr Provision for Depreciation — [Asset Class] £X

For multiple asset classes (premises, equipment, motor vehicles), there are SEPARATE Provision accounts and SEPARATE depreciation charges. A single combined Depreciation Expense line typically appears in the IS, but the SOFP shows each asset class separately.

Why the two-account method:

• Asset Account: stays at COST throughout the asset's life.
• Provision Account: accumulates the depreciation.
• This preserves the original cost information for the SOFP and disposal calculations.

Consistency concept requires the same method year on year for the SAME asset. Method changes must be disclosed.

Straight-line: $\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Constant charge each year.

Reducing balance: $\text{Annual Depreciation} = \text{Carrying Amount at start of year} \times \text{Rate \%}$

Declining charge each year. Apply to CARRYING AMOUNT, not cost.

Units of production: $\text{Annual Depreciation} = (\text{Cost} - \text{Residual}) \times \frac{\text{Units used in year}}{\text{Total estimated units}}$

Charge varies with actual usage.

Standard SOFP non-current asset format:

Why three columns? Preserves original cost AND shows wear-and-tear. A single-column 'carrying amount' presentation loses information.

The £119,500 total is what flows up to 'Total Non-Current Assets' in the broader SOFP.

When an asset is sold:

Step 1 — Remove the cost: Dr Disposal Account, Cr Asset Account at cost. Step 2 — Remove the accumulated depreciation: Dr Provision for Depreciation, Cr Disposal Account. Step 3 — Record proceeds: Dr Bank, Cr Disposal Account. Step 4 — Calculate gain/loss: balancing figure in Disposal Account. Step 5 — Transfer to IS: Dr (or Cr) Income Statement for the loss (or gain).

Disposal Account format:

Gain on disposal = Proceeds > Carrying Amount → Cr Income Statement (other income). Loss on disposal = Proceeds < Carrying Amount → Dr Income Statement (expense).

Matching (accruals): depreciation matches the cost of the asset to the periods that benefit from its use.

Consistency: the same depreciation method is used year-on-year for the same asset class.

Going concern: the asset is valued at carrying amount (Cost − Accumulated) because the business will continue using it. If going concern doesn't apply, the asset would be valued at its forced-sale value.

All three concepts can be cited in 'explain' questions to earn AO3 marks.