Head to www.savemyexams.

com for more awesome resources

Edexcel IGCSE Accounting: Your notes

Introduction to Bookkeeping &
Accounting
Depreciation
Contents
Causes of Depreciation
Methods of Depreciation
Provision for Depreciation
Disposal of Non-Current Assets

Page 1 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Causes of Depreciation
Your notes
Introduction to Depreciation
What is depreciation?
Depreciation is applied to non-current assets to represent the reduction in their value
Depreciation is the financial measure of how the value of an asset decreases over time
Depreciation is an expense that accounts for the estimated loss in value of an asset during a given
period
It is an expense that does not involve spending money
It is used to spread the cost of the assets over their expected useful life
You need to know two methods to calculate depreciation
Straight line method
Reducing balance method
The accounting concept of consistency states that when a business chooses a method of
depreciation for a type of non-current asset, it must use that method each year unless there is a valid
reason to change to a different method
Different methods can be used for different types of non-current assets

Why are non-current assets depreciated?

Depreciation is used so that the business adheres to the following accounting concepts:
Accruals
The capital expenditure of a non-current asset is matched against the income that it has
contributed to
Suppose that a business buys a vehicle for $30 000 and expects it to be useful for 8 years
The full $30 000 should not be charged as an expense straightaway
Instead, the expense should be spread out over the 8 years that it is contributing to income
Prudence
The value of the assets should not be overstated
Depreciation allows the business to report a more realistic estimation for the valuation of its assets

Page 2 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Is depreciation charged in the years of purchase and sale?

Different businesses will have different policies for dealing with depreciation for the year in which the Your notes
asset is purchased and the year in which the asset is sold or disposed of
The business could:
Charge a full year’s worth of depreciation
Charge no depreciation
Charge a proportion of the full year’s worth of depreciation
The exam question will specify which rules should be used

Causes of Depreciation
What are the causes of depreciation?
The value of a non-current asset depreciates due to:
Wear and tear of the asset
The asset becoming outdated or obsolete
The reduction in the expected useful lifetime of the asset
The asset being used up or depleted

Cause Explanation

Wear and tear The non-current asset might deteriorate which causes it to be less useful. This could be
due to excessive use or physical deterioration such as rust. For example, a vehicle
might have scratches which lowers its value.

Obsolescence The non-current asset might lose value as technology advances. The non-current
might become inadequate for the growing needs of the business. For example, a
computer might become obsolete when a newer model is released.

Passage of The non-current asset might have a fixed number of years. For example, a vehicle might
time be leased for five years.

Depletion The non-current asset might be used up so that there is nothing left. For example, the
business might have natural resources such as oil which will eventually be used up.

Page 3 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Methods of Depreciation
Your notes
Straight Line Depreciation
What is the straight line method of depreciation?
The straight line method of depreciation assumes that a non-current asset loses value at a constant
rate over its useful life
This means that the expense for its depreciation is the same each year
The carrying value can reach $0
This is when the asset is fully depreciated
You could be given the depreciation rate as a percentage of its original value
E.g. depreciation could be charged at 20% of its original cost
Or you could be expected to calculate the depreciation using:
The number of years that the non-current asset will be used
The expected value of the non-current asset at the end of its working life
This value could be $0
The expected value is also called the residual value or the disposal value
This method is usually used when the asset will be equally valuable for each year of its use
For example, fixtures and fittings, equipment, etc

Page 4 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

Example of an asset which cost $20 000, being charged depreciation at 15% per annum using the
straight line method

How do I calculate depreciation using the straight line

method?
If you are given the percentage for the depreciation
Find the percentage of the original amount
This will be the yearly depreciation charge
If you are not given the percentage
Calculate the expected loss in value during the expected life of the non-current asset
The original value minus the expected value at the end of its life
Divide the loss by the number of years it will be used
This will be the yearly depreciation charge

original value − expected value

Depreciation =
number of years

EXAM TIP
Page 5 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

The straight line method is similar to simple interest calculations used in maths.

Your notes
WORKED EXAMPLE
Abi purchases machinery for $18 000. Machinery is depreciated at 15% per annum using the straight
line method.
Calculate the carrying value of the machinery after 3 years.
Answer
Calculate the yearly expense due to depreciation
15% ✕ $18 000 = $2 700
Calculate the total depreciation after 3 years
3 ✕ $2 700 = $8 100
Subtract the depreciation from the original value
$18 000 - $8 100 = $9 900

WORKED EXAMPLE
Taiki purchases a vehicle for $30 000. He expects to use the vehicle for 3 years, after which he
estimates that it will have a value of $12 000.
Calculate the yearly expense due to the depreciation of the vehicle.
Answer
Calculate the loss in value over the 3 years
$30 000 - $12 000 = $18 000
Divide this by the number of years
$18 000 ÷ 3 = $6 000

Reducing Balance Depreciation

What is the reducing balance method of depreciation?
The reducing balance method of depreciation assumes that the non-current asset loses value at a
rate proportional to its current value
This means that the expense for its depreciation gets smaller each year as the current value
decreases

Page 6 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

You will be told the percentage of the current value to use for depreciation
This method is usually used when a non-current asset initially loses value at a fast rate Your notes

Example of an asset, which cost $20 000, being charged depreciation at 30% per annum using the
reducing balance method

How do I calculate depreciation using the reducing balance

method?
Find the percentage of the current carrying value
This will be the depreciation charge for that year
If you need to calculate the depreciation for multiple years, then calculate one year at a time
Find the depreciation charge for one year using the carrying value at that start of the year
Subtract this amount from the carrying value at the start of the year to find the new carrying value
Find the depreciation charge for the next year using the carrying value at the start of that year
Continue this process
If you just need to find the current carrying value then you can use some maths skills
Subtract the percentage from 100%

Page 7 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Write this as a decimal

Raise this to the power of the number of years Your notes
Multiply this by the original value

EXAM TIP
The reducing balance method is similar to compound interest calculations used in maths.
Amounts should always be given to the nearest dollar in exams.

WORKED EXAMPLE
Abi purchases a vehicle for $16 000. Machinery is depreciated at 25% per annum using the reducing
balance method.
Calculate the carrying value of the machinery after 3 years.
Answer
Find the depreciation charged in each year by finding the percentage of the carrying value at that
time.
Subtract that year’s depreciation from the carrying value to find the carrying value at the end of the
year.

End of year Depreciation charge Carrying value

0 - $16 000

1 25% ✕ $16 000 = $4 000 $16 000 - $4 000 = $12 000

2 25% ✕ $12 000 = $3 000 $12 000 - $3 000 = $9 000

3 25% ✕ $9 000 = $2 250 $9 000 - $2 250 = $6 750

Alternatively:
Subtract the percentage from 100%
100% - 25% = 75%
Write this as a decimal
75% = 0.75
Raise this to the power of the number of years
0.753
Multiply this by the original value

Page 8 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

$16 000 ✕ 0.753 = $6 750

Your notes

Page 9 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Provision for Depreciation

Your notes
Provision for Depreciation
What is a provision for depreciation account?
A provision for depreciation account for a non-current asset is used to record the depreciation for
that asset
It is important for a business to keep a record of both the following amounts:
The original cost of the non-current asset
The carrying value of the non-current asset
Therefore, a business will use two accounts for each type of non-current asset:
The non-current asset (at cost) account
Entries are only made in this account when non-current assets are purchased, sold or
otherwise disposed of
The provision for depreciation of the non-current asset account
Depreciation charges are recorded here each year
The carrying value can be found by subtracting the balance of the provision for depreciation account
from the balance of the non-current asset account

How do I record depreciation in the ledger accounts?

No entries are made in the non-current asset account for depreciation
The book of original entry for depreciation is the journal
To record the yearly depreciation at the end of the financial year:
Debit the income statement
This is because depreciation for the year is an expense
Credit the provision for depreciation account
You can then balance the provision for depreciation account
The closing balance will be the accumulated depreciation of the non-current asset
Not just the yearly charge

Page 10 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

The opening balance will be brought down on the credit side

How do I record depreciation in the financial statements? Your notes
The income statement only shows the depreciation charge for that financial year
This is listed under the expenses
This is the same amount as the credit entry made to the provision for depreciation account
The statement of financial position shows three values labelled as:
Cost
This is the original cost of the non-current asset
This is the debit balance in the non-current asset account
Accumulated depreciation
This is the total depreciation of the asset
This is the credit balance in the provision for depreciation account
This is the balance after the year’s depreciation has been entered
Carrying value
This is the difference between the cost value and the provision for depreciation value

EXAM TIP
It can help to think of the provision for depreciation account as a copy of the non-current asset
account. This helps to understand why the entry is on the credit side, as it is reducing the value of an
asset.
Be very careful that you only enter the amount of depreciation for that year, not the total
depreciation to date.

WORKED EXAMPLE
Katrina is a sole trader. Katrina charges depreciation at 20% per annum using the reducing balance
method. Below are balances at 1 March 2023.

Equipment 20 000

Provision for depreciation on equipment 4 000

Page 11 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Katrina also purchased additional equipment on 1 December 2023 for $5 000 by bank transfer.
Katrina charges a full year’s depreciation in the year the equipment is purchased.
Your notes
Prepare Katrina’s equipment account and provision for depreciation on equipment account for the
year ended 29 February 2024. Balance the accounts at 29 February 2024 and bring down the
balances at 1 March 2024.
Answer
Start with the equipment account.
Enter the balance of $20 000 as the opening balance on the debit side as it is an asset account
Enter the $5 000 for the additional equipment on the debit side
Do not enter any depreciation
Balance the account and bring down the new balance
Katrina
Equipment Account

Date Details $ Date Details $

2023 2024
Mar 1 Balance b/d 20 000 Feb 29 Balance c/d 25 000

Dec 1 Bank 5 000

25 000 25 000

2024
Mar 1 Balance b/d 25 000

Next complete the provision for depreciation account.

Enter the balance of $4 000 on the credit side as it is the reduction of an asset
The equipment can be combined as a full year’s worth of depreciation is charged on the new
equipment
Find the total cost of the equipment
$20 000 + $5 000 = $25 000
Subtract the provision for depreciation to find the carrying value before charging that year’s
depreciation
$25 000 - $4 000 = $21 000
Find 20% of the carrying value to calculate the depreciation charge
20% ✕ $21 000 = $4 200
Enter this on the credit side of the provision for depreciation account with the label “income
statement”
Page 12 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Balance the account and bring down the new balance

Katrina
Provision for Depreciation on Equipment Account Your notes

Date Details $ Date Details $

2024 2023
Feb 29 Balance c/d 8 200 Mar 1 Balance b/d 4 000

2024
Feb 29 Income Statement 4 200

8 200 8 200

2024
Mar 1 Balance b/d 8 200

Page 13 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Disposal of Non-Current Assets

Your notes
Profit or Loss on a Sale of a Non-Current Asset
Can a business sell a non-current asset?
A non-current asset can be sold when the business no longer needs it
This is referred to as the disposal of a non-current asset
The sale of the non-current asset could be a cash sale or credit sale
If it is a credit sale then a nomial ledger account is created for the person or business buying the
asset
This account is referred to as an other receivables account to avoid confusion with trade
receivables accounts
The money received from the sale is called the proceeds of the sale
This is a capital receipt
A non-current asset can also be used as a part-exchange for a new non-current asset
The business and the supplier of the new asset will agree on the value of the old asset
The business will give the old asset to the supplier
The supplier will reduce the cost of the new asset by the value of the old asset

EXAM TIP
Do not include the sale of a non-current asset in the sales account! The sales account is just for the
sale of goods. The sale of a non-current asset will be detailed in a disposal account.

How do I calculate the profit or loss on a sale of a non-current

asset?
STEP 1
Calculate the carrying value of the non-current asset
The cost of the asset minus the accumulated depreciation
STEP 2
Calculate the difference between the proceeds of the sale and the carrying value

Page 14 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

STEP 3
Determine if a profit or loss has been made
Your notes
If the proceeds of the sale are greater than the carrying value then it is a profit
This means too much depreciation has been charged
If the proceeds of the sale are smaller than the carrying value then it is a loss
This means not enough depreciation has been charged

EXAM TIP
Check whether the question says there is a depreciation charge for the non-current asset in the year
of sale. If there is then calculate that year’s depreciation and include it in the provision for
depreciation account before working out the carrying value.

WORKED EXAMPLE
Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges
depreciation at 20% per annum using the straight line method.
Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in
the year the equipment is purchased and none in the year it is sold.
Calculate the gain or loss on disposal of the equipment.
Answer
STEP 1 - Calculate the carrying value
Calculate the yearly depreciation charge
20% ✕ $30 000 = $6 000
Calculate the accumulated depreciation
Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023
No depreciation is charged in the year of sale
3 ✕ $6 000 = $18 000
Calculate the carrying value
$30 000 - $18 000 = $12 000
STEP 2 - Calculate the difference between the sale proceeds and the carrying value
$13 000 - $12 000 = $1 000
STEP 3 - The sale proceeds are higher than the carrying value therefore it is a profit
Profit of $1 000

Page 15 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Disposal Account
Your notes
What is a disposal account?
A disposal account is used to show the calculation of the profit or loss on a sale of a non-current asset
The profit or loss is transferred to the income statement
The account will then have a zero balance

How do I record the sale of a non-current asset in the ledger

accounts?
The book of original entry is the journal
Deal with each transaction one at a time
STEP 1
Reduce the non-current asset account by the original value
Credit the non-current asset account
Because the value of the assets is decreasing
Debit the disposal account
STEP 2
Reduce the provision of depreciation account by the accumulated depreciation of the non-current
asset
Debit the provision for depreciation account
Credit the disposal account
STEP 3
Increase the cash, bank or other receivables account
Debit the relevant asset account
Cash, if received
Bank, if money is received by cheque or bank transfer
Other receivables account if it was sold on credit
Credit the disposal account
STEP 4
Include the profit or loss of the sale

Page 16 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

If a profit is made, then this is an income for the business

Credit the income statement Your notes
Debit the disposal account
If a loss is made, then this is an expense to the business
Debit the income statement
Credit the disposal account

The layout of a disposal account

EXAM TIP
The disposals account should balance. If it does not balance, then check for any mistakes. Some
students calculate the profit or loss by completing steps 1 to 3 and then finding the amount needed
to balance the disposal account. If you use this method, be extra careful that you put the entries on
the correct side.

WORKED EXAMPLE
Riz owes an embroidery business and owns machinery. Riz purchased an additional machine on 1
March 2022 for $30 000. Riz depreciates machinery using the straight line method using the
assumption that machinery fully depreciates after five years. Riz charges depreciation at the end of
each month. Riz sells this additional machinery on 31 December 2023 and receives a cheque for
$17 500. No other non-current assets were sold in the financial year ending 29 February 2024.

Page 17 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Prepare the disposal account for machinery for the year ended 29 February 2024.
Answer Your notes
Calculate the yearly depreciation charge
$30 000 ÷ 5 = $6 000
Calculate the monthly depreciation charge
$6 000 ÷ 12 = $500
Calculate the number of months that Riz owned the machinery
1 March 2022 to 31 December 2023 is 22 months.
Calculate the accumulated depreciation of the machinery
22 ✕ $500 = $11 000
Calculate the carrying value at 31 December 2023
$30 000 - $11 000 = $19 000
Calculate the loss on the sale
$19 000 - $17 500 = $1 500
The sale proceeds are less than the carrying value so it was a loss
Fill in the disposal account
1. Enter the original cost on the debit side
2. Enter the accumulated depreciation on the credit side
3. Enter the sale proceeds on the credit side
4. Enter the loss on the credit side
Riz
Disposal Account

Date Details $ Date Details $

2023 2023
Dec 31 Machinery 30 000 Dec 31 Provision for depreciation 11 000

Dec 31 Bank 17 500

2024
Feb 29 Income statement 1 500

30 000 30 000

Page 18 of 18

© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers