Cambridge Syllabus Notes

4.2 Accounting for Depreciation and Disposal of Non‑Current Assets

Objective: Define Depreciation

Depreciation is the systematic allocation of the cost of a non‑current asset over its estimated useful life. It is a revenue‑type expense that reduces the asset’s carrying amount on the statement of financial position and is an accounting estimate rather than a physical loss.

Why Depreciation is Required

Wear and tear – the asset physically deteriorates through use.
Obsolescence – newer technology or market changes reduce the asset’s usefulness.
Usage – the asset’s value declines in proportion to the amount it is used.
Ensures the matching principle: the expense is recognised in the same periods that the asset contributes to revenue, giving a realistic picture of profit.

Methods Required by the Cambridge IGCSE (0452) Syllabus

Method	Formula (per year)	Typical Use
Straight‑Line (SL)	\(\displaystyle \frac{C - S}{n}\)	Assets that provide equal benefit each year.
Reducing‑Balance (RBA) – Double‑Declining Balance	\(\displaystyle \text{Depreciation} = \frac{2}{n}\times \text{Carrying amount at start of year}\)	Assets that lose value quickly in the early years.
Revaluation (increase in carrying amount)	— (no depreciation formula)	Used when an asset’s fair value rises substantially (e.g., land, property). This is a policy change, not a depreciation method.

Note: The IGCSE requires the double‑declining‑balance rate of 2 ÷ n. Other declining‑balance rates are not examined.

Example Calculations

1. Straight‑Line Method

Cost of asset, \(C = £10{,}000\)
Estimated salvage value, \(S = £2{,}000\)
Useful life, \(n = 5\) years
Annual depreciation: \(\displaystyle \frac{10{,}000 - 2{,}000}{5}=£1{,}600\)
After 3 years:
Accumulated depreciation = \(3 \times 1{,}600 = £4{,}800\)
Carrying amount = \(10{,}000 - 4{,}800 = £5{,}200\)

2. Reducing‑Balance (Double‑Declining) Method

Cost \(C = £10{,}000\), salvage \(S = £2{,}000\), useful life \(n = 5\) years.
Depreciation rate = \(\dfrac{2}{5}=40\%\).
Year 1:
Depreciation = \(40\% \times £10{,}000 = £4{,}000\)
Carrying amount end of year = £6{,}000
Year 2:
Depreciation = \(40\% \times £6{,}000 = £2{,}400\)
Carrying amount end of year = £3{,}600
Year 3:
Depreciation = \(40\% \times £3{,}600 = £1{,}440\)
Carrying amount end of year = £2{,}160
Year 4 (adjusted to avoid falling below salvage):
Depreciation = £2{,}160 – £2{,}000 (salvage) = £160
Carrying amount end of year = £2{,}000 (salvage value reached)
Year 5: No further depreciation – carrying amount remains £2{,}000.

3. Revaluation (Increase in Carrying Amount)

If the same machine is revalued to a fair value of £12 000 at the start of Year 4, the carrying amount is increased by £8 400. The increase is recorded in the equity account Revaluation Surplus. Subsequent depreciation is then calculated on the new carrying amount (£12 000) using the chosen method.

Recording Depreciation – Journal Entry

Account	Debit	Credit
Depreciation Expense	£1 600 (or amount calculated for the year)
Accumulated Depreciation – [Asset]		£1 600 (or amount calculated for the year)

Disposal of Non‑Current Assets

Definition

Disposal occurs when an asset is sold, scrapped, traded‑in, or otherwise removed from the business’s use. The accounting treatment removes the asset’s cost and accumulated depreciation from the statement of financial position and recognises any gain or loss.

Key Steps

Determine the carrying amount at the date of disposal:
\(\text{Carrying amount} = C - \text{Accumulated Depreciation}\)
Compare the proceeds (or scrap value) with the carrying amount.
Calculate gain or loss:
\(\text{Gain} = \text{Proceeds} - \text{Carrying amount}\) (if positive)
\(\text{Loss} = \text{Carrying amount} - \text{Proceeds}\) (if positive)
Record the journal entry to remove the asset, its accumulated depreciation, and to recognise any gain or loss.

Journal Entries – Typical Scenarios

Scenario	Journal Entry (illustrative amounts)
Sale for cash	Debit Cash – £5 000 Debit Accumulated Depreciation – £3 000 Credit Asset (e.g., Machinery) – £8 000 Credit Gain on Disposal – £0 (if proceeds = carrying amount) or Debit Loss on Disposal – £500 (if proceeds < carrying amount)
Scrapped (no proceeds)	Debit Accumulated Depreciation – £3 000 Debit Loss on Disposal – £5 000 Credit Asset – £8 000
Trade‑in for a new asset	Debit New Asset – £12 000 Debit Accumulated Depreciation – £3 000 Credit Old Asset – £8 000 Credit Cash/Payable – £7 000 (balance) Debit/Credit Gain or Loss on Disposal as required

Example – Sale of a Machine

Cost = £8 000
Accumulated depreciation at disposal = £5 000
Carrying amount = £3 000
Proceeds from sale = £4 200
Gain = £4 200 – £3 000 = £1 200
Journal entry:
Debit Cash – £4 200
Debit Accumulated Depreciation – £5 000
Credit Machine – £8 000
Credit Gain on Disposal – £1 200

Summary

Depreciation allocates the cost of a non‑current asset over the periods it helps generate revenue, satisfying the matching principle. The Cambridge IGCSE syllabus requires knowledge of:

Definition and purpose of depreciation.
Three required methods: Straight‑Line, Reducing‑Balance (double‑declining, 2 ÷ n), and the revaluation policy (increase in carrying amount, not a depreciation calculation).
Formulas and step‑by‑step calculations for each method, including the final‑year adjustment for reducing‑balance.
Recording depreciation with the standard journal entry.
Disposal of non‑current assets – calculation of carrying amount, gain/loss, and appropriate journal entries.

Mastering these points enables students to calculate, record, and explain the treatment of non‑current assets in accordance with the Cambridge IGCSE Accounting (0452) syllabus.

define depreciation