IGCSE Accounting

Manarat Ahmed

Course Instructor:

Depreciation
Definitions:
i)DepreciationDepreciation can be defined as the fall in the value of a fixed asset due to use or elapse of time. It is
a non-cash expense for the business.
ii)Fixed assetsFixed assets are assets which have a long useful lifetime and are bought with the intention of using
them but not to resell them. E.g.- machinery.
Causes of depreciation:
(i)Wear and tear, (ii)Obsolescence, (iii)Erosion, rusting, rot and decay, (iv)Depletion, (v)Time factor
Methods of depreciationi)Straight line, (ii)Reducing balance , (iii)Revaluation (Opening value+ value used-closing value)

Methods of depreciation :
a)Straight-line:
In this method, depreciation is calculated on the COST value
Advantages :
i) It is considered as the most popular method because of its simplicity and also because it is also
easily understandable.
ii) No further calculations are required since the same figure of depreciation is charged every year.
Disadvantages :
i) The method is unrealistic as it is not possible to have the same amount of depreciation each year.
ii) Recalculation is required when new assets are bought.

b)Reducing balance ( /diminishing balance) :

In this method, depreciation is charged on NET BOOK VALUE
NET BOOK VALUE = Cost - Provision for depreciation
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Advantages :
i ) The method is more realistic since depreciation is charged more in early years.
ii) It shows an accurate residual or scrap value rather than showing a zero balance.
Disadvantages:
i) This method is complex and complicated to maintain in the books of accounts.

Definitions :
Capital Expenditures :These are expenditures that are used to purchase fixed assets with the
intention of not reselling them and which will bring benefit to the business for more than one
accounting period.
e.g. purchase of machinery.
Capital expenditure includes all the costs which are required to bring the machinery in its place which
includes transportation and installation expenses.
Revenue expenditures :
These are expenditures that are used to maintain the day-to-day expenses of a company and will
bring benefit to the business for the current accounting period only.
e.g. rent expenses, electricity expenses, wages , salaries or any relevant expenses.

Concepts related to Depreciation :

Prudence it anticipates loss (provision for depreciation )
Consistency ensures the use of a single method of depreciation within the same accounting period.
These accounting concepts are important to apply because it leads to the preparation of true and
fair values of accounts (fixed assets and depreciation) which will be required by decision makers for
evaluating financial statements (profit and loss account and balance sheet).

Recording:
Dr.

Fixed assets at cost A/C

Cr.

Details
Balance b/d
Bank/creditors
(addition of fixed assets)

X
X
X

Balance b/d

Details
Disposal (CP of the asset sold)
Balance c/d
(balancing figure)

X
X
X

X
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(i)Profit and loss A/C- Dr.

Provision for depreciation A/C - Cr.
Dr.

Provision for depreciation A/C

Cr.

Details
Disposal
(depreciation of the asset sold)
Balance c/d

X
X

Details

Balance b/d
Profit and loss A/C
(Depreciation of this year)

X
X

Balance b/d
Dr.

Disposal A/C
Cr.

Details
Fixed asset at cost
(CP the asset sold)

P.L A/C (Gain on disposal)

X
X

Details
Prov. for depreciation
(depreciation of the asset sold)
Bank / Debtor (SP of the asset
sold)
P.L A/C (Loss on disposal)

X
X
X
X

iv) Profit and loss A/C:

Details

Gross profit
Add gain on disposal
Less expenses: Depreciation
Loss on disposal
Net profit/Net Loss

X
X
X

X
X
(X)
X

Balancing figures vary from question to question.

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