DEPRECIATION &

DISPOSAL OF 

NON-CURRENT
ASSETS
• define depreciation 


• explain the reasons for accounting for depreciation 


• name and describe the straight-line, reducing balance and revaluation methods
of depreciation 


• prepare ledger accounts and journal entries for the provision of depreciation 


• prepare ledger accounts and journal entries to record the sale of non-current
assets, including the use of disposal accounts. 

DEPRECIATION
• Estimated loss in value of Non-current asset

Usage
Depreciation
Value
APPLICATION TO 

ACCOUNTING PRINCIPLE

Matching

Prudence
CAUSES OF DEPRECIATION
Physical Deterioration
• Wear & Tear
• Erosion, Rust, etc
Economic Reason
• Obsolescence
• Inadequacy
Passage of Time

Depletion
METHODS OF
DEPRECIATION
FACTORS THAT AFFECT THE SELECTION OF
DEPRECIATION METHOD


Measureme
Estimated nt of the
Useful Life
Selling Price Usage
Benefit
METHODS OF DEPRECIATION

Straight Line Reducing Revaluation

• (Cost - RV) / Balance • Opening Value
Useful Life • % x NBV + Purchases
• % x Cost (Disposal) -
Closing Value
STRAIGHT LINE METHOD

• Same rate of depreciation applied to cost.

• Benefit of usage is expected to be equal per year.
STRAIGHT LINE METHOD

(cost − residualvalue)
• usefullife
• Rate of depreciation x cost
STRAIGHT LINE METHOD

• 30 June
• 1 July ’17
2013 Expecte
Bought d selling
Fixtures • 30 June price $
$25,000 ‘15 3,000

• 30 June • 30 June
‘14 ‘16

Depreciation/ year?
% of depreciation?
CALCULATION

• Depreciation for the year = (Cost - Residual Value) / Useful life

= ($ 25 000 - $ 3000) / 4
= $ 5,500
• % of depreciation = (Depreciation / Cost) x 100%
= $5 500 / $25 000 x 100%
= 22%
TABLE OF CALCULATION

Date Cost Depreciation for Provision for Net Book Value*

the year Depreciation
1 July ‘13 25,000 25,000

30 June ‘14 25,000 5,500 5,500 19,500

30 June ‘15 25,000 5,500 11,000 14,000

30 June ‘16 25,000 5,500 16,500 8,500

30 June ‘17 25,000 5,500 22,000 3,000

∗ ) 𝑁𝐵𝑉 = 𝐶𝑜𝑠𝑡 − 𝑃 𝑟𝑜𝑣 .  𝑓𝑜𝑟 𝑑𝑒𝑝𝑟 .

REDUCING BALANCE METHOD

• Same rate of depreciation applied to net book value.

• Higher benefit at the early useful life.
REDUCING BALANCE METHOD

• Rate of depreciation x Net Book Value

REDUCING BALANCE METHOD

Rate of • 30 June
• 1 July depreciation ’17
‘13 Expecte
Bought 40 % d selling
Fixtures • 30 June price $
$25,000 ‘15 3,000

• 30 June • 30 June
‘14 ‘16

Depreciation/ year?
TABLE OF CALCULATION

Date Cost Depreciation for Provision for Net Book Value*

the year Depreciation
1 July ‘13 25,000 25,000

30 June ‘14 25,000 10,000* 10,000 15,000

30 June ‘15 25,000 6,000** 16,000 9,000

30 June ‘16 25,000 3,600 19,600 5,400

30 June ‘17 25,000 2,160 21,760 3,240

*) 40% x $25 000

**) 40% x ($25 000 -10 000)
REVALUATION METHOD

• Valuation at every end of period.

• Time consuming to keep detailed records of inexpensive assets
REVALUATION METHOD

• Depreciation = Opening Value + Purchases of Non-current

Assets — Disposal of NCA — Closing Value
REVALUATION METHOD

• 1 July 2013
Bought Fixtures
$ 25,000

• 30 June 2014
Value of Fixtures
becomes $ 20,500
CALCULATION

• Depreciation for the year = $25 000 - $20 500

• = $ 4 500
ACCOUNTING
ENTRIES OF
DEPRECIATION
LEDGER
PROVISION FOR
DEPRECIATION OF NCA
ACCOUNT
DEPRECIATION
• Expense
(income
statement)
• Non Current
Asset
(Deduction)
EXAMPLE 12.5
Date Cost Depreciation for Provision for Net Book Value
the year Depreciation
1 July ‘13 25,000 25,000
30 June ‘14 25,000 10,000 10,000 15,000
30 June ‘15 25,000 6,000 16,000 9,000
30 June ‘16 25,000 3,600 19,600 5,400
30 June ‘17 25,000 2,160 21,760 3,240

Dr Fixtures Account Cr
2013 2014
July 1 Bank 25,000 June 30 Balance c/d 25,000

25,000 25,000
2014 2015
July 1 Balance b/d 25,000 June 30 Balance c/d 25,000
25,000 25,000
2015
July 1 Balance b/d 25,000
EXAMPLE 12.5
Date Cost Depreciation for Provision for Net Book Value
the year Depreciation
1 July ‘13 25,000 25,000
30 June ‘14 25,000 10,000 10,000 15,000
30 June ‘15 25,000 6,000 16,000 9,000
30 June ‘16 25,000 3,600 19,600 5,400
30 June ‘17 25,000 2,160 21,760 3,240

Dr Provision for Depreciation of Fixtures Account Cr

2014 2014
June 30 Balance c/d 10,000 June 30 Income 10,000
Statement
10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income 6,000
Statement
16,000 16,000
July 1 Balance b/d 16,000
REVALUATION METHOD

• Depreciation is recorded as a deduction on the Non-current

Assets account.
EXAMPLE 12.7

Dr Fixtures Account Cr
2013 2014
July 1 Bank 25000 June 30 Income 4500
Statement
Balance c/d 20500

25000 25000
2014
July 1 Balance b/d 20500
JOURNAL ENTRIES
Journal
Dr ($) Cr ($)

2014 Income Statement 10 000

June 30

Provision for 10 000

Depreciation of
Fixtures and Fittings
Annual depreciation charge transfer to
Income Statement
2015 Income Statement 6 000
June 30

Provision for 6 000

Depreciation of
Fixtures and Fittings
Annual depreciation charge transfer to
Income Statement
DEPRECIATION
IN FINANCIAL
STATEMENTS
DEPRECIATION IN INCOME
STATEMENT
Dr Provision for Depreciation of Fixtures Account Cr
2014 2014
June 30 Balance c/d 10,000 June 30 Income Statement 10,000

10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income Statement 6,000

16,000 16,000
July 1 Balance b/d 16,000

Kavita
Extract from Income Statement
For the year ended 30 June 2014
$
Expenses – Depreciation of Fixtures 10,000
DEPRECIATION IN INCOME
STATEMENT
Dr Provision for Depreciation of Fixtures Account Cr
2014 2014
June 30 Balance c/d 10,000 June 30 Income Statement 10,000

10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income Statement 6,000

16,000 16,000
July 1 Balance b/d 16,000

Kavita
Extract from Income Statement
For the year ended 30 June 2015
$
Expenses – Depreciation of Fixtures 6,000
DEPRECIATION IN BALANCE
SHEET
Dr Provision for Depreciation of Fixtures Account Cr
2014 2014
June 30 Balance c/d 10,000 June 30 Income Statement 10,000

10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income Statement 6,000

16,000 16,000
July 1 Balance b/d 16,000

Kavita
Extract from Balance Sheet
at 30 June 2014

Non Current Assets Cost Depr. To Date NBV

Fixtures 25,000 10,000 15,000
DEPRECIATION IN BALANCE
SHEET
Dr Provision for Depreciation of Fixtures Account Cr
2014 2014
June 30 Balance c/d 10,000 June 30 Income Statement 10,000

10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income Statement 6,000

16,000 16,000
July 1 Balance b/d 16,000

Kavita
Extract from Balance Sheet
at 30 June 2015

Non Current Assets Cost Depr. To Date NBV

Fixtures 25,000 16,000 9,000
WHICH NON CURRENT ASSETS
ARE APPROPRIATE?
• Fixed Cost of
Straight Maintenance
Line • Fixed usage

• High maintenance cost

Reducing at the end
Balance • Quickly become
outdated
• Not practical for detail
Revaluation record
DISPOSAL OF
NON CURRENT
ASSETS
DISPOSAL
Disposal
Sales of Non Current
Assets

Temporary Account

Prepared to calculate the

gain or loss on disposal
FACTORS IN DISPOSAL
COST

PROVISION FOR
DEPRECIATION

SELLING PRICE
GAIN ON DISPOSAL

SELLING
NBV PRICE GAIN

SELLING
NBV PRICE LOSS
LEDGER
DISPOSAL OF NON
CURRENT ASSETS
ACCOUNT

Capital Expenditure Capital Receipt

CASE 1

• Motor vehicle cost $ 50 000 on 1 January 2010

• Straight line method at 5% per annum
• At the end Year 8 (31 December , it was sold for cash $ 35 000
• Depreciation = $ 50 000 x 5 % = $ 2 500
• Accumulated Depreciation = $ 2 500 x 8 years = $ 20 000
• Net Book Value = $ 50 000 - $20 000 = $30 000
• Gain or Loss = Selling Price - NBV = $ 35 000 - $ 30 000 = $ 5
000
CASE 1
DISPOSAL OF Motor
Vehicles ACCOUNT

$ $
Motor Vehicles 50 000 Cash 35 000
Income Statement Provision for Depreciation
(Profit or Gain on Disposal) 5 000
of Motor Vehicles 20 000
55 000 55 000
CASE 1
Motor Vehicles
ACCOUNT

$ $
Balance b/d 50 000 Disposal of
Motor Vehicles 50 000
CASE 1
Provision for Deprectiation of
Motor Vechicles ACCOUNT

$ $
Disposal of Motor Balance b/d 20 000
Vehicles 20 000
CASE 2

• Motor Vehicle $ 10 000

• 4 years SLM
• Depreciation for year = Cost / useful life = $ 2 500
• Accumulated Depreciation Year 4 = $ 10 000
• At then end of Year 4, sold for $ 2 000 cash
• NBV at Year 4 = $ 0
• Gain on Disposal = $ 2 000
CASE 2
DISPOSAL OF Motor
Vehicles ACCOUNT

$ $
Motor Vehicle 10 000 Cash 2 000

Provision for 10 000

Income Statement 2 000
Depreciation
(Profit or Gain on Disposal)
EXAMPLE 12.10
• 1 July
2017
Rate of Sold
depreciation Fixtures
• 1 July 40 %, RB for $
2013 3,100 on
Bought Method credit to
Fixtures • 30 June Traders
$25,000 2015 Ltd.

• 30 June • 30 June
2014 2016
LEDGER
Dr Fixtures Account Cr
2013 2014
July 1 Bank 25,000 June 30 Balance c/d 25,000

25,000 25,000
2014 2015
July 1 Balance b/d 25,000 June 30 Balance c/d 25,000
25,000 25,000
2015 2016
July 1 Balance b/d 25,000 June 30 Balance c/d 25,000
25,000 25,000
2016 2017
July 1 Balance b/d 25,000 June 30 Balance c/d 25,000
25,000 25,000
2017
July 1 Balance b/d 25,000 July 1 Disposal of 25,000
Fixtures
LEDGER
Dr Provision for Depreciation of Fixtures Account Cr
2014 2014
June 30 Balance c/d 10,000 June 30 Income Statement 10,000

10,000 10,000
2015 July 1 Balance b/d 10,000
June 30 Balance c/d 16,000 2015
June 30 Income Statement 6,000

16,000 16,000
2016 July 1 Balance b/d 16,000
June 30 Balance c/d 19,600 2016
June 30 Income Statement 3,600

19,600 19,600
2017 July 1 Balance b/d 19,600
June 30 Balance c/d 21,760 2017
June 30 Income Statement 2,160
21,760 21,760
July 1 Disposal of 21,760 July 1 Balance b/d 21,760
Fixtures
LEDGER
Dr Disposal of Fixtures Account Cr
2017 2017
July 1 Fixtures 25,000 July 1 Provision for 21,760
depreciation of
Fixtures
Traders Ltd. 3,100
2018
June 30 Income 140
Statement
(Loss on
Disposal)
25,000 25,000
JOURNAL ENTRIES
Journal
2017 Dr ($) Cr ($)
July 1 Disposal of Fixtures 25 000

Fixtures 25 000

Provision for 21 760

Depreciation of
Fixtures

Disposal of Fixtures 21 760

Trade Receivables - 3 100

Traders Ltd.

Disposal of Fixtures 3 100

Transfer of fixtures and Provision for

Depreciation of Fixtures to disposal account
and sale of fixtures on credit
JOURNAL ENTRIES
Journal
2018 Dr ($) Cr ($)
June 30 Income Statement 140

Disposal of Fixtures 140

Loss on Disposal transferred to Income

Statement
DISPOSAL IN INCOME
STATEMENT
Dr Disposal of Fixtures Account Cr
2017 2017
July 1 Fixtures 25,000 July 1 Provision for 21,760
depreciation of
Fixtures
Traders Ltd. 3,100
2018
June 30 Income Statement 140
25,000 25,000

Kavita
Extract from Income Statement
For the year ended 30 June 2018
$
Expenses – Loss on Disposal of Fixtures 140
THE END