notes on depreciation

1. IGCSE
ACCOUNTING
0452
DEPRECIATION

2. OBJECTIVES
• Understand the nature & causes of depreciation
• Examples of NCA in depreciation
• Understand the main methods of calculation depreciation
• Make entries to record depreciation in the ledger
• Make entries to record depreciation in the financial statements.

3. RECALL PREVIOUS CHAPTER
ASSETS CURRENT ASSETS NON -CURRENT ASSETS
PERSONAL LIFE
(YOU)
BUSINESS
NON -CURRENT ASSETS

4. Estimate cost of the loss in
value of a non-current asset
(NCA) over its expected
working life.
INTRODUCTION
Misleading info- if accounting
records shows cost prices
Most of NCA of business will loss
value over period of time.
Must record estimated loss value
for all NCA (depreciation value
only)
• PURCHASE NCA – CAPITAL
EXPENDITURE
• NOT A EXPENSES
Cost of NCA is spread over the
years which benefit from use of
that asset

5. EXAMPLES OF NCA
PERSONAL
• Vehicles
• Gadgets
• Others
BUSINESS
• Machineries
• Vehicles
• Equipment
• Furniture
• Building

6. CAUSES OF DEPRECIATION
CAUSES EXPLAINATION
PHYSICAL DETERIORATION Wear & tear – normal usage & rust, rot and
delay
ECONOMIC REASONS No longer meet business needs
PASSAGE OF TIME Lease, fixed life of a set number of years
DEPLETIONS Wells & mines – land reduces as value

7. METHOD OF CALCULATING
DEPRECIATION
Straight Line Method
Diminishing Value
Method
Annuity Method
Machine Hour Rate
Method
Revaluation Method
Sum-of-the-years’
Digit Method

8. METHOD OF
CALCULATING
DEPRECIATION
STRAIGHT LINE METHOD
(SLM)
REDUCING BALANCE METHOD
(RBM)
REVALUATION METHOD (RM)

9. DEFINATION
• Fixed instalment method
• Same amount of depreciation/
same % rate each year.
• Benefit equally from the use of
the asset.
• Residual value/ scrap value/
salvage value – estimate value
given by business.
FORMULA
STRAIGHT LINE METHOD

10. EXAMPLE OF SLM
QUESTION
• Kavitha’s financial year ends on
30 June.
• On 1/7/2013 she purchased
fixtures costing $25,000 & paid by
cheque. She estimated that she
would be able to use the fixtures
for 4 years.
• CALUCULATE THE ANNUAL
DEPRECIATION CHARGE:
As an amount money
As a percentage
ANSWER

11. REDUCING BALANCE METHOD
• Same % rate applied, but it is
calculated on a different value
each year.
• Net book value for each year
• Book value
• % rate
DEFINATION FORMULA

12. • Kavitha’s financial year end on 30
June
• On 1/7/2013, she purchased
fixtures costing $25,000 & paid by
cheque. She estimated that she
would be able to use the fixtures for
4 years & then able to sell them for
$3,000.
• CALCULATE DEPRECIATION FOR
EACH OF 4 YEARS OF THE
FIXTURES’ WORKING LIFE USING
RBM AT 40% RATE.
QUESTION ANSWER
EXAMPLE OF RBM

13. REVALUATION METHOD
• Small items of equipment used in
offices & laboratories, packing
cases, loose tolls normally use
this method
• Assets are valued at the end of
each financial year.
DEFINATION FORMULA

14. EXAMPLE OF REVALUATION METHOD
• Kavitha’s financial year end on 30
June
• On 1/7/2013, she purchased
fixtures costing $25,000 & paid by
cheque. She decided to revalue the
fixtures at the end of the year. On
30/6/2014, the fixtures were valued
at $20,500.
• CALCULATE THE DEPRECIATION
FOR THE YEAR ENDED 30/6/2014.
QUESTION ANSWER

15. PAST YEAR
PAPER
0452/11/O/N/12