Business – 10.1 Financial statements – Depreciation | e-Consult
10.1 Financial statements – Depreciation (1 questions)
Login to see all questions.
Click on a question to view the answer
Depreciation calculation
- Cost = £120,000
- Residual value = £20,000
- Useful life = 5 years
- Annual depreciation = (Cost – Residual) ÷ Useful life = (£120,000 – £20,000) ÷ 5 = £20,000
Impact on the profit or loss account
- Depreciation expense of £20,000 is charged as an operating expense.
- Profit before depreciation is reduced by £20,000, lowering the net profit for the year.
Impact on the statement of financial position
- Machinery (non‑current asset) remains recorded at its original cost of £120,000.
- Accumulated depreciation increases by £20,000, shown as a contra‑asset.
- Net book value (NBV) of the machinery after year 1 = £120,000 – £20,000 = £100,000.
- Equity is reduced by the same £20,000 because retained earnings fall.