VCE Accounting Unit 4

1. 16.1
WHY IS DEPRECIATION
CHARGED?

2. © Michael Allison, Trinity Grammar School.
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
16.1 WHY IS DEPRECIATION CHARGED?
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, Trinity Grammar School.
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
16.1 WHY IS DEPRECIATION CHARGED?

4. © Michael Allison, Trinity Grammar School.
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
16.1 WHY IS DEPRECIATION CHARGED?
 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

5. © Michael Allison, Trinity Grammar School.
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
16.1 WHY IS DEPRECIATION CHARGED?

6. © Michael Allison, Trinity Grammar School.
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
16.1 WHY IS DEPRECIATION CHARGED?

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
16.1 WHY IS DEPRECIATION CHARGED?
 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
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, Trinity Grammar School.
Author’s permission required for external use
16.1 WHY IS DEPRECIATION CHARGED?
 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
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, Trinity Grammar School.
Author’s permission required for external use
 Depreciation allows the revenues
of the van to be matched against
its expense (depreciation)
 For example, the delivery van
has the following details:
 Cost = $35,000
 Estimated useful life = 3 years
 Estimated residual value =
$5,000
Depreciation expense =
ResidualCost -
Useful Life
= $10,000
2015 2016 2017
Revenue = $25,000 Revenue = $25,000 Revenue = $25,000
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $10,000-
Net Profit = $15,000=
16.1 WHY IS DEPRECIATION CHARGED?