Chapter 12: Accounting for Depreciation and disposal of non-

current assets
1. Explain what is meant by depreciation.
- Depreciation is an estimate of the loss in value of non-
current assets over its expected working life.

2. Explain the purpose of depreciation. / Explain why Sukesh

should be providing for depreciation on his non-current
assets.
- To spread the cost of non-current assets over their useful
lives.
- To apply the accruals (matching) principle
i. recognising the time difference between payment
for the non-current assets and its loss in value.
ii. The loss in value of the non-current asset during the
year is set against the revenue for the same period.
iii. The cost of the non-current asset is spread over the
years which benefit from the use of that asset.
- To apply the prudence principle to avoid overstating the
assets and profit for the year.
- To record loss in value of non-current assets consumed
during the period of use.

3. State FOUR reasons why assets depreciate.

- Physical deterioration/ obsolescence/ out of date
- Economic reasons
- Passage of time
- Depletion

4. THREE methods of calculating depreciation:

5. a. Describe the straight line method of depreciation.

- The straight line method of depreciation uses the same
amount of depreciation each year.
b. State the circumstances when this method of depreciation
may be used.
 - This method is used where each year is expected to
benefit equally from the use of the asset.

6. a. Describe the reducing (diminishing) balance method of

depreciation.
- The reducing balance method of depreciation uses the
same percentage rate of depreciation each year, but it is
calculated on the book value at the end of each year.

b. State the circumstances when this method of depreciation

may be used.
- This method is used where the greater benefits from the
use of the asset will be gained in the early years of its life.

7. a. Describe the revaluation method of depreciation.

- The asset is valued at the end of each year and the
difference between the opening and closing value is the
depreciation for the year.

b. State the circumstances when this method of depreciation

may be used.
- This method is used where it is impractical or difficult to
maintain detailed records of the asset.

8. Explain why Herman Wagner revalued the loose tools at the

end of each financial year rather than using the straight line
or reducing balance method of depreciation.
- This is an application of the principle of materiality.
- It is not practical to keep detailed records of loose tools.

9. Double entry of depreciation.

DEBIT: Income statement
CREDIT: Provision for depreciation of (non-current assets)
 10. Steps of recording disposal of non-current assets.

STEP 1: Eliminate cost from non-current assets account

DEBIT: Disposal of (non-current assets)

CREDIT: Non-current assets

STEP 2: Eliminate accumulated depreciation from Provision

for depreciation of (non-current assets) account

DEBIT: Provision for depreciation of (non-current assets)

CREDIT: Disposal of (non-current assets)

STEP 3: Record money received from disposing non-current

assets or trade receivables if sold on credit
DEBIT: Cash/ Bank/ Trade receivables
CREDIT: Disposal of (non-current assets)

STEP 4: Record profit/ loss from disposal

DEBIT: Disposal of (non-current assets) If it is a profit

CREDIT: Income statement from disposal

DEBIT: Income statement If it is a loss

CREDIT: Disposal of (non-current assets) from disposal