name and describe the straight-line, reducing balance and revaluation methods of depreciation

4.2 Accounting for Depreciation and Disposal of Non‑Current Assets

Purpose of Depreciation

• Allocates the cost of a non‑current asset to the periods in which it helps generate revenue.
• Ensures the income‑statement shows the true expense for the year.
• Reduces the carrying amount of the asset on the statement of financial position (balance sheet).

1. Methods of Depreciation

1.1 Straight‑Line Method

Definition: The depreciable amount (Cost – Residual value) is spread evenly over the asset’s useful life.

Formula

\[ \text{Annual depreciation}=\frac{\text{Cost}-\text{Residual value}}{\text{Useful life (years)}} \]

When to use: Assets that provide a roughly equal benefit each year (e.g., buildings, furniture).

1.2 Reducing‑Balance (Written‑Down) Method

Definition: A fixed percentage is applied to the opening book value each year; because the base falls, the charge declines.

Formula

\[ \text{Depreciation for the year}= \text{Opening book value} \times \text{Depreciation rate} \]

When to use: Assets that lose value more quickly in early years (e.g., vehicles, computers).

1.3 Re‑valuation Method (also called the “Current‑value” method)

Definition: Depreciation is based on the asset’s current market (or re‑valued) amount rather than its original cost.

Formula

\[ \text{Annual depreciation}= \frac{\text{Current market value} - \text{Residual value}}{\text{Remaining useful life (years)}} \]

When to use: When the asset’s fair value changes significantly each year (e.g., land, specialised equipment). The method is permitted in IGCSE but not required; students should be able to name and describe it.

2. Journal & Ledger Entries for the Provision of Depreciation

2.1 Journal entry (same for all three methods)

Account	Debit (£)	Credit (£)
Depreciation expense	Amount calculated
Accumulated depreciation – [Asset]		Amount calculated

2.2 Ledger (T‑account) illustration

Assume a computer bought for £12 000, residual £2 000, useful life 5 years (Straight‑Line £2 000 per year).

Depreciation expense	Accumulated depreciation – Computer
Dr £2 000	Cr £2 000
Dr £2 000	Cr £2 000
…	…

The balance in the Accumulated depreciation T‑account after Year 3 is £6 000, leaving a carrying amount of £6 000 (£12 000 – £6 000).

3. Disposal of a Non‑Current Asset

3.1 General steps

1. Remove the asset’s original cost.
2. Remove the accumulated depreciation attached to the asset.
3. Record any cash (or bank) received.
4. Recognise a gain or loss:
   Gain = Cash received – Book value
   Loss = Cash received – Book value (when negative)

3.2 Journal entry for disposal

Account	Debit (£)	Credit (£)
Cash / Bank	Amount received
Accumulated depreciation – [Asset]	Balance carried forward
Loss on disposal (if any)	Loss amount
Gain on disposal (if any)		Gain amount
[Asset] (cost account)		Original cost

3.3 Ledger (T‑account) illustration – disposal example

Printer: Cost £8 000, Accumulated depreciation £5 000, sold for £3 500.

Printer (Cost)	Accumulated depreciation – Printer	Gain on disposal	Cash
Cr £8 000	Dr £5 000	Cr £500	Dr £3 500

Result: Net gain of £500 appears in the income statement; the printer and its accumulated depreciation disappear from the balance sheet.

4. Worked Numerical Examples

4.1 Straight‑Line

• Cost: £12 000
• Residual value: £2 000
• Useful life: 5 years

Annual depreciation = (£12 000 – £2 000) ÷ 5 = £2 000

Year	Opening BV (£)	Depreciation (£)	Closing BV (£)
1	12 000	2 000	10 000
2	10 000	2 000	8 000
3	8 000	2 000	6 000
4	6 000	2 000	4 000
5	4 000	2 000	2 000 (residual)

4.2 Reducing‑Balance (20 % rate)

• Cost: £10 000
• Residual value: £1 000
• Rate: 20 % per annum

Year	Opening BV (£)	Depreciation (20 %) (£)	Closing BV (£)
1	10 000	2 000	8 000
2	8 000	1 600	6 400
3	6 400	1 280	5 120
4	5 120	1 024	4 096
5	4 096	819.20	3 276.80
…	…	…	…
Final year (adjusted)	≈ 1 200	200 (limited)	1 000 (residual)

4.3 Re‑valuation Method

• Original cost: £15 000
• Residual value: £3 000
• Remaining life: 4 years
• Current market value at start of year: £13 000

Depreciation for the year = (£13 000 – £3 000) ÷ 4 = £2 500

Year	Opening BV (£)	Depreciation (£)	Closing BV (£)
1	13 000	2 500	10 500
2	10 500	1 875	8 625
3	8 625	1 406.25	7 218.75
4	7 218.75	1 054.69	6 164.06 (≈ residual)

5. Quick Recap – Straight‑Line vs. Reducing‑Balance vs. Re‑valuation

Aspect	Straight‑Line	Reducing‑Balance	Re‑valuation
Pattern of expense	Equal each year	Higher early, falls later	Based on current market value each year
Formula	(Cost – Residual) ÷ Useful life	Opening BV × Rate	(Current market – Residual) ÷ Remaining life
Typical assets	Buildings, furniture	Vehicles, computers	Land, specialised equipment with volatile fair value
Effect on profit	Steady reduction	Higher profit in later years	Varies with market movements

6. Key Points to Remember (AO1)

1. Depreciation spreads the cost of a non‑current asset over the periods it benefits.
2. IGCSE 0452 requires you to name and describe the Straight‑Line, Reducing‑Balance and Re‑valuation methods.
3. Journal entry for provision: Depreciation expense Dr / Accumulated depreciation Cr. Show the corresponding T‑accounts.
4. Stop depreciating when the book value reaches the residual (or the minimum allowable) value.
5. For the first year, assume a full year of depreciation unless the question states otherwise.
6. Disposal: remove cost and accumulated depreciation, record cash received, and recognise any gain or loss.
7. The total depreciation charged can never exceed the depreciable amount (Cost – Residual).