VCE Accounting

1. 13.1
WHY CHARGE
DEPRECIATION?

2. © Michael Allison. Author’s permission required for external use.
 The purpose of a business owning non-current assets is to use them
to generate revenue
 For example, a business uses a delivery vehicle for 3 years to make
sales to customers
13.1 WHY CHARGE DEPRECIATION?
2015 2016 2017
2015
Made sales deliveries of
$25,000
2016
Made sales deliveries of
$25,000
2017
Made sales deliveries of
$25,000

3. © Michael Allison. Author’s permission required for external use.
 But a non-current asset doesn’t just earn revenue – it also has
an expense which represents its usage throughout the period
 This is called depreciation:
 The allocation of a cost of a non-current asset over its useful working
life
 Represents how much of the asset was consumed (used up) in order
to earn revenue this period
13.1 WHY CHARGE DEPRECIATION?

4. © Michael Allison. Author’s permission required for external use.
 Depreciation expense is:
 The amount of depreciation written off as an expense during the
reporting period
 How much of the non-current asset was consumed (used up) during the
period
 For example, you pay $10,000 for a car today that will last for the next
5 years
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
13.1 WHY CHARGE DEPRECIATION?

5. © Michael Allison. Author’s permission required for external use.
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Unused, 8,000
Unused, 6,000
Unused, 4,000
Unused, 2,000
Used, 2,000
Used, 4,000
Used, 6,000
Used, 8,000
Used, 10,000
Year 1 Year 2 Year 3 Year 4 Year 5
13.1 WHY CHARGE DEPRECIATION?

6. © Michael Allison. Author’s permission required for external use.
 For example, a firm bought a $10,000 delivery van to last for the next 5
years. Each period the van will help generate revenue of $8,000.
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
 Alternative treatment…
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$10,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
13.1 WHY CHARGE DEPRECIATION?

7. © Michael Allison. Author’s permission required for external use.
 Why must depreciation be charged each period?
Reporting Period Principle:
• At the end of each period, the revenues for that period must be
matched against all expenses
• Depreciation must be calculated to represent the expense (amount
used) of the non-current asset for the period
• This is then matched against the revenues generated from using
the asset in order to determine profit
13.1 WHY CHARGE DEPRECIATION?
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000

8. © Michael Allison. Author’s permission required for external use.
 Why must depreciation be charged each period?
Relevance:
• Depreciation is relevant as it represents the expense (amount used)
of the asset this period
• This enables an accurate profit to be determined
13.1 WHY CHARGE DEPRECIATION?
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000

9. © Michael Allison. Author’s permission required for external use.
 Depreciation:
 Spreads the cost of an asset over the period of time the asset is used to
generate revenue
 Matches the Revenue earned during a period from using the Asset with the
Expense incurred in using the Asset
 Enables the firm to fulfil the Reporting Period principle and Relevance by
allowing it to match its revenues with all relevant expenses from the period
13.1 WHY CHARGE DEPRECIATION?
Year 1 Year 5Year 2 Year 3 Year 4
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Depreciation
$2,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Revenue
$8,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000
Net Profit
$6,000

10. © Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
SQ1 X
SQ2 X