Depreciation

Definition
Depreciation as the ‘allocation of the
depreciable amount of an asset over its
estimated life’.

It is the part of the cost of a non current

asset that is consumed during the period it is
used by a business.
The Objective of
Depreciation
According to the matching concept,
revenues should be matched with expenses
in order to determine the accounting profit.
The cost of the asset purchased should be
spread over the periods in which the asset
will benefit a company.
Depreciable Assets
The assets are acquired or constructed with the
intention of being used and not with the intention
for resale.
IAS regards assets as depreciable when they
◦ Are expected to be used in more than one
accounting period.
◦ Have a finite useful life, and
◦ Are held for use in the production or supply of
goods and services, for rental to others, or for
administrative purposes.
 Non-Depreciable Asset
Freehold Land
◦ It has an indefinite useful life, and it retains its
value indefinitely.
Leasehold Land (Long Lease)
◦ It has an unexpired lease period not less than 50
years
Costs which can be included in the
statement of financial position when the
asset is purchased
the initial purchase price
any import duties, taxes directly attributable to bring
the asset to its present location and condition
the costs of site preparation
initial delivery and handling costs
installation and assembly costs
cost of testing the asset
professional fees (e.g. architects or legal fees).
Purchase Price
Acquisition cost of a fixed asset:
◦ Invoice price (after deducting any trade discounts)
◦ Expenditures incurred in bringing the asset to a location
and condition suitable for its intended use.
◦ E.g. Import duty, freight charges, insurance, etc.
◦ Expenditures incurred in improving the asset. They
increase the expected future benefit from the existing
fixed asset.
◦ E.g. Additional motor for machinery, the extension of a factory,
etc.
Example
A company purchased a machine for $50,000.
In addition, an import duty of $5,000, landing
charges of $2,000 and installation costs of $1,000
were paid.
A service contract was entered into for the life of
the machine at a cost of $800 per annum.
The depreciation is charged at 10% of the cost per
annum.
Expenditure Capital Revenue
items expenditure expenditure
$ $
Invoice price 50,000
Import duty 5,000
Landing charges 2,000
Installation cost 1,000
Service charges 800
58,000 800

Cost of the machine = $58,000

Annual depreciation charge = $58,000 x 10% = $5,800
 Example
The supplier’s invoice for a machine was as follows:

$ $
List price 200,000
Less Trade discount 10,000
Trade-in value 50,000 60,000
140,000
Delivery charges 2,000
Adaptation and testing 3,000
Maintenance 1,500
Spare components 1,000 7,500
147,500

**The depreciation is charged at 10% of cost per annum.

Expenditure items Capital Revenue
expenditure expenditure
$ $
Invoice price
($200,000 - $10,000) 190,000
Delivery charges 2,000
Adaptation and
testing 3,000
Maintenance 1,500
Service charges 1,000
195,000 2,500

Cost of the machine = $195,000

Annual depreciation =$195,000*10% = $1,950
Production cost
An asset is produced by the firm itself, the
following expenditures should be included in the
cost of the asset:
◦ Cost of raw materials
◦ Direct cost of production, e.g. direct labour, royalties, etc.
◦ A Reasonable proportion of factory overhead expenses /
indirect production costs, e.g. indirect raw materials,
indirect labour, indirect expenses and interest on
borrowed capital to finance the production of the asset.
 Example
A company constructed a machine. The related costs
are as follows:
$
Drafting and design 8,000
Construction:
Materials and components 12,000
Assembling wages 5,000
Other expenses 2,000
Testing and Adaptation 3,000
** Depreciation is charged at 10% of cost per annum
Cost of the machine = $8,000 + $12,000 + $5,000 + $2,000 + $3,000
= $30,000
Annual depreciation = $30,000*10% = $3,000
IMPORTANT NOTES
A full year’s depreciation is taken in the year of
acquisition , but none in the year of disposal if
question does not gives the dates of acquisition
and disposal.
The chosen method of depreciating an asset
should be used consistently.
The straight line method is used for assets that
are expected to earn revenue evenly over their
useful working lives.
IMPORTANT NOTES
The reducing balance should be used when it is
considered that an asset’s earning power will
diminish as the asset gets older.
Depreciation Methods
(A) Straight Line Method
(B) Reducing Balance Method/Diminishing
Balance Method
(C) Revaluation Method
(A) Straight Line Method
Depreciation is computed by dividing the depreciable amount of the
asset by the expected number of accounting periods of its useful life.

Depreciation = Cost of Asset – Estimated Residual

Value
Estimated Useful Economic Life
Useful Economic Life
Useful economic life is not equal to physical life
It is the period over which the present owner intends to use the asset
 Residual Value
It is the amount received after disposal of the asset

Cost of asset - Residual value = Total amount to be depreciated

Example
Cost of asset $1200
Residual/scrap/salvage value $200
Estimated useful life 4 years
Annual charge for depreciation
= $1200-$200
4
= $1000
4
=$250
• Additional capital expenditures are made to increase the
value of a fixed asset
• Depreciation of those extra capital expenditures should be
charged over the remaining useful life of the asset
Example
A company bought a machine for $1,000 on 1 January 1996
Estimated life of 4 years, no scrap value
1 January 1997, an additional motor of $90 was fitted into the machine
Expected that the useful life of the machine would not be affected
Depreciation for 1996
= $1000
4
= $250
Annual depreciation from 1997 onwards
= $1000 $90
+
4 3

= $280
 (B) Reducing Balance Method /
Diminishing Balance Method
Reason
◦ Greater benefit is to be obtained from the early years of using an asset
◦ Appropriate to use the reducing balance method which charges more in the
earlier years.

Annual Depreciation = Net Book Value x Depreciation Rate

= (Cost – Accumulated Depreciation) x Depreciation Rate
Example
Cost of assets $10,000
Residual value $256
Useful life 4 years

Depreciation Rate
4 256
= (1 - ) x 100%
100,000

= (1 – 0.4) x 100%

= 60%
Annual Depreciation
Annual Depreciation
= Net Book Value x Depreciation Rate
= (Cost – Accumulated Depreciation) x Depreciation Rate

Year 1 10,000 x 60% = $6,000

Year 2 (10,000 – 6,000) x 60% = $2,400
Year 3 (10,000 – 8,400) x 60% = $ 960
Year 4 (10,000 – 9,360) x 60% =$ 384
(C) Revaluation Method
For some small-value assets such as loose tools

Depreciation

= Value at the beginning of the year (Opening

balance) + Purchases in the year – Value at the
end of the year (Closing balance)
 Asset
Balance b/f opening P & L – Depreciation X
Bank purchases Balance c/f closing
X X

Depreciation for the year is the balancing figure.

 Example
The value of the loose tools changes during 1996 as shown
below:
1996
Jan 1 Value of loose tools $2,000
Dec 31 Purchases in the year $ 500
Dec 31 Value of loose tools $1,000
Loose Tools
1996 $ 1996 $
Jan 1 Balance b/f 2,000 Dec 31 P & L 1,500
Dec 31 Bank-purchases 500 Dec 31 Balance c/f 1,000
2,500 2,500

Depreciation for the year = $1,500

 Accounting for Depreciation
Accounting Treatment
Dr. Fixed Asset Purchase price and other
Cr. Bank/Vendor capital expenditure

Dr. Income Statement

Cr. Provision for Depreciation
Example
In a business with financial years ended 31
December. A machine is bought for $2,000 on 1
January Year 1. The estimated useful life is 5 years.
You are to show:
◦ (a) Machinery account
◦ (b) Provision for depreciation
◦ (c)Income Statementfor the year ended 31 Dec Year 1, 2,
and 3.
◦ (d) Balance sheet as at those date

(1) Using straight line method and reducing balance

method, at the rate of 20%.
 Straight Line Method
Year 1
Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,000 Dec 31 Bal c/d 2,000

Provision for dep. – Machinery

Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S 400
(2000/5)
 Profit and Loss for the year ended 31 Dec
Year 1
Less: Expenses $
Depreciation - Machinery 400

Balance Sheets as at 31 Dec

Year 1
Non Current Asset $
Machinery at cost 2,000
Less: Provision for Dep. 400
1,600
 Year 2
Provision for dep. – Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S 400
Year 2 Year 2
Dec 31 Bal. c/d 800 Jan 1 Bal. b/d 400
Dec 31 I/S 400
800 (2000/5) 800
 Profit and Loss for the year ended 31 Dec
Year 1 Year 2
Less: Expenses $ $
Depreciation - Machinery 400 400

Balance Sheets as at 31 Dec

Year 1 Year 2
Fixed Asset $ $
Machinery at cost 2,000 2,000
Less: Provision for Dep. 400 800
1,600 1,200
Year 3
Provision for dep. – Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S400
Year 2 Year 2
Dec 31 Bal. c/d 800 Jan 1 Bal. b/d 400
Dec 31 I/S 400
800 800
Year 3 Year 3
Dec 31 Bal. c/d 1,200 Jan 1 Bal. b/d 800
Dec 31 I/S 400
1,200 1,200
 Profit and Loss for the year ended 31 Dec
Year 1 Year 2 Year 3
Less: Expenses $ $ $
Depreciation - Machinery 400 400 400

Balance Sheets as at 31 Dec

Year 1 Year 2 Year 3
Fixed Asset $ $ $
Machinery at cost 2,000 2,000 2,000
Less: Provision for Dep. 400 800 1,200
1,600 1,200 800
 Reducing Balance Method
Year 1 Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,000 Dec 31 Bal c/d 2,000

Provision for dep. – Machinery

Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S 400
(2000*20%)
 Profit and Loss for the year ended 31 Dec
Year 1
Less: Expenses $
Depreciation - Machinery 400

Balance Sheets as at 31 Dec

Year 1
Fixed Asset $
Machinery at cost 2,000
Less: Provision for Dep. 400
1,600
Year 2 Provision for dep. – Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S 400
Year 2 Year 2
Dec 31 Bal. c/d 720 Jan 1 Bal. b/d 400
Dec 31 I/S 320
720 (2000-400)*20% 720
 Profit and Loss for the year ended 31 Dec
Year 1 Year 2
Less: Expenses $ $
Depreciation - Machinery 400 320

Balance Sheets as at 31 Dec

Year 1 Year 2
Fixed Asset $ $
Machinery at cost 2,000 2,000
Less: Provision for Dep. 400 720
1,600 1,280
Year 3 Provision for dep. – Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 I/S 400
Year 2 Year 2
Dec 31 Bal. c/d 720 Jan 1 Bal. b/d 400
Dec 31 I/S 320
720 720
Year 3 Year 3
Dec 31 Bal. c/d 976 Jan 1 Bal. b/d 720
Dec 31 I/S 256
976 (2000-720)*20% 976
 Profit and Loss for the year ended 31 Dec
Year 1 Year 2 Year 3
Less: Expenses $ $ $
Depreciation - Machinery 400 320 256

Balance Sheets as at 31 Dec

Year 1 Year 2 Year 3
Fixed Asset $ $ $
Machinery at cost 2,000 2,000 2,000
Less: Provision for Dep. 400 720 976
1,600 1,280 1,024
Disposal Account
Should be opened when
◦ The asset is sold, or
◦ The asset is disposed of due to an accident.
 Accounting Treatment
Dr. Disposal
Cost price of the asset sold
Cr. Non Current Asset
Dr. Provision for Depreciation Depreciation already charged on
Cr. Disposal the assets concerned
Dr. Cash / Vendee Proceeds received / receivable
Cr. Disposal on the disposal
In case of loss on the disposal (Debit side greater than credit side)
Dr. Income Statement
With any loss on the disposal
Cr. Disposal
In case of profit on the disposal (Credit side greater than debit side)
Dr. Disposal
With any profit on the disposal
Cr. Income Statement
Example
In a business with financial years ended 31
December. A machine is bought for $2,000 on 1
January Year 1. The estimated useful life is 5 years.
In Year 4, the machinery has been sold for $1,070.
Show the accounting entries:
You are to show:
◦ (a) Machinery account
◦ (b) Provision for depreciation
◦ (c) Disposal account
◦ (d) Income Statement and Balance sheet as at 31 Dec Year
4
 Machinery
Year 4 $ Year 4 $
Jan 1 Bal. b/d 2,000 Dec 31 Disposal 2,000

Pro. For Dep.

Year 4 $ Year 4 $
Dec 31 Disposal 976 Jan 1 Bal. b/d 976
Disposal
Year 4 $ Year 4 $
Dec 31 Machinery 2,000 Dec 31 Pro. For Dep. 976
Dec 31 I/S – gain 46 Dec 31 Bank 1,070
2,046 2,046
Profit and Loss for the year ended 31 Dec
Year 4
$ $
Gross profit X
Add: Gains on disposal 46
Less: Expenses
Loss on disposal X

E.g. if the machinery was sold for $ 900.

Disposal
Year 4 $ Year 4 $
Dec 31 Machinery 2,000 Dec 31 Pro. For Dep. 976
Dec 31 Bank 900
Dec 31 I/S- loss on 124
disposal
2,000 2,000
Depreciation on monthly/full-
year basis
Fixed assets can be purchased and sold at any time
during the accounting year.
◦ Depreciation on a monthly basis:
◦ Based on the fraction of the year in which the asset is held.
◦ Depreciation on a full-year basis:
◦ Full year’s depreciation in the year of purchase and none in the year
of disposal irrespective of the period in which the asset is held.
In an examination, it is necessary for the students to follow the
approach required by the question. Where no indication is given, the
monthly basis approach is recommended.
Example
A company bought two motor vehicles for $2,400 each on 1
July 1996. One of the vehicles was sold for $1,500 on 1 April
1998.
Depreciation is to be charged:
1. At 20% on the straight line basis (monthly basis)
2. At 20%, using the straight line method,and bases on assets in
existence at the end of each year, ignoring items sold during
the year
Prepare the following accounts:
Motor vehicle account
Provision for depreciation,
Disposal account for the year ended 31 Dec 1996,1997 and 1998.
(1.
) Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800

Provision for dep. – Motor

Vehicles
1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 I/S 480
($4,800 x 20% x 6/12)
 Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800
1997 1997
Jan 1 Bal. b/d 4,800 Dec 31 Bal. c/d 4,800

Provision for dep. – Motor Vehicles

1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 I/S
($4,800 x 20% x 6/12) 480
1997 1997
Dec 31 Bal. c/d 1,440 Jan 1 Bal. b/d 480
Dec 31 I/S
($4,800 x 20%) 960
1,440 1,440
 Motor Vehicles
1996 $ $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800
1997 Year 2
Jan 1 Bal. b/d 4,800 Dec 31 Bal. c/d 4,800
1998 1998
Jan 1 Bal. b/d 4,800 Apr 1 Disposal of MV 2,400
Dec 31 Bal. c/f 2,400
4,800 4,800
 Provision for dep. – Motor Vehicles
1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 I/S
($4,800 x 20% x 6/12) 480
1997 1997
Dec 31 Bal. c/d 1,440 Jan 1 Bal. b/d 480
Dec 31 I/S
($4,800 x 20%) 960
1,440 1,440
1998 1998
Dec 31 Disposal [$2,400 Jan 1 Bal. b/d 1,440
x 20% x (6/12 + 1 + 3/12)] 840 Dec 31 I/S ($2,400 x 20%
Dec 31 Bal. c/f 1,200 x 3/12 + $2,400 x 20%) 600
2,040 2,040
 Disposal of Motor Vehicle
1998 $ 1998 $
Dec 31 Machinery 2,400 Apr 1 Pro. For Dep.[$2,400
x 20% x (6/12 + 1 + 3/12)] 840
Apr 1 Bank 1,500
Dec 31 I/S – loss 60
2,400 2,400
(2.
) Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800

Provision for dep. – Motor

Vehicles
1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 I/S 960
($4,800 x 20% )
 Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800
1997 1997
Jan 1 Bal. b/d 4,800 Dec 31 Bal. c/d 4,800
Provision for dep. – Motor Vehicles
1996 $ 1996 $
Dec 31 Bal. c/d 960 Dec 31 I/S ($4,800 x 20%) 960

1997 1997
Dec 31 Bal. c/d 1,920 Jan 1 Bal. b/d 960
Dec 31 I/S ($4,800 x 20%) 960
1,920 1,920
(2.
) Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800
1997 Year 2
Jan 1 Bal. b/d 4,800 Dec 31 Bal. c/d 4,800
1998 1998
Jan 1 Bal. b/d 4,800 Apr 1 Disposal 2,400
Dec 31 Bal. c/f 2,400
4,800 4,800
 Provision for dep. – Motor Vehicles
1996 $ 1996 $
Dec 31 Bal. c/d 960 Dec 31 I/S ($4,800 x 20%) 960

1997 1997
Dec 31 Bal. c/d 1,920 Jan 1 Bal. b/d 960
Dec 31 I/S ($4,800 x 20%) 960
1,920 1,920
1998 1998
Apr 1 Disposal ($2,400 Jan 1 Bal. b/d 1,920
x 20% x 2)] 960 Dec 31 I/S ($2,400 x 20%) 480
Dec 31 Bal. c/f 1,440
2,400 2,400
 Disposal of Motor Vehicle
1998 $ 1998 $
Dec 31 Machinery 2,400 Apr 1 Pro. For Dep.($2,400
Dec 31 I/S – gain 60 x 20% x 2) 960
Apr 1 Bank 1,500

2,460 2,460
Trade-in-allowance
The assets being trade in for a new assets
◦ Accounting entries:
◦ Dr. Non Current Assets
◦ Cr. Disposal
◦ With the trade-in value of disposed asset
Example
A company purchased machine for $2,500 each on 1
Jan. Year 1.
It is the company’s policy to provide for
depreciation on its machinery at a rate of 20%, with
a full year’s depreciation made in the year in which a
machine is purchased, but none in the year of sale.
One machine was traded in and a new machine for
$4,000 was purchased on 1 Feb. Year 2.
The trade-in value of the old machine was $1,000.
 Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,500 Dec 31 Bal. c/d 2,500

Provision for dep.-Machinery

Year 1 $ Year 1 $
Dec 31 Bal. c/d 500 Dec 31 I/S 500
(2500*20%)
 Machinery
Year 2 $ Year 2 $
Jan 1 Bal. b/d 2,500 Feb 1 Disposal 2,500
Feb1 Disposal: trade- Dec 31 Bal. c/d 4,000
in-allowance 1,000
Feb1 Bank 3,000
6,500 6,500
Provision for dep.-Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 500 Dec 31 I/S 500
Year 2 Year 2
Feb 1 Disposal 500 Jan 1 Bal b/d 500

Disposal
Year 2 $ Year 2 $
Feb 1 Machinery 2,500 Feb1 Dep. 500
Feb 1 Machinery:
trade-in-allowance 1,000

2,500 2,500
Factors Determining
the Amount of
Depreciation
The Carrying Amount of
Assets

Cost
◦ Purchase price
◦ Production cost
Revalued Value
Revalued value
Where assets are revalued in the financial
statements, the provision for depreciation should
be based on the revalued amount and the current
estimate of the remaining useful life.
 Example

A company purchased a machine for $1,000 on 1 January 1996.

It is assumed that the useful economic life of the machine is 4 years.
Depreciation has been provided at 25% per annum on cost.

Balance Sheet as at 31 December 1996 (Extract)

$
Machinery, at cost 1,000
Less Provision for Dep. 250
($1,000 x 25%)
1,250
•E.g. The machine was revalued on 1 January 1997 at
$1,500. There is no change in its estimated remaining
useful life.

Value of the machinery = $1,500

The remaining useful economic life = 4-1 = 3 years
Depreciation for 1997 = $1,500 ÷ 3 = $500
Balance Sheet as at 31 December 1997 (Extract)
$
Machinery, at valuation 1,500
Less Provision for Dep. 500
1,000
NON CURRENT ASSET
SCHEDULE
IAS 1 presentation of financial
statements
IAS 1 presentation of financial
statements
IAS 1 presentation of financial
statements
NON CURRENT ASSET
SCHEDULE
Example
Capital and Revenue
Expenditure
Expenditure
It is the amount of economic resources given up in obtaining goods and
services.
Capital Expenditure
It is an expenditure to:
◦ Get a long-term benefit,
◦ Buy fixed assets, or
◦ Add to the value of an existing fixed asset.
Example
Acquiring fixed asset, such as premises, equipment, fixtures and
furniture, etc.
Expenditure which is spent to prepare the asset for its intended use,
such as freight charges, legal cost, installation cost, landing charge,
import duty of buying the asset.
Revenue Expenditure
It is an expenditure for:
◦ The acquisition of assets for resale, or
◦ For the purpose of earning revenue income.
Example
Buying trading stock
Administrative expenses, selling expenses, or financial expenses
Accounting Treatment
Capital Expenditure
◦ On acquiring assets,
Dr. Asset accounts
Cr. Bank / Cash / Creditors
At the year end, the balances go to the Balance
Sheet
Revenue Expenditure
◦ When there are expenses,
Dr. Expenses accounts
Cr. Bank / Cash / Creditors
At the year end, the balances will be debited to the
Profit and Loss Account, or Trading Account.
Example
On acquiring premises, how do we distinguish between capital and
revenue expenditures?
Expenditure Benefit Nature of Accounting
Expenditure Treatment
(a) Buying a Long-term Capital Dr. Premises
house benefit Cr.
 fixed asset Bank/Cash/
acquired Creditor
(b) Legal cost Long-term Capital Dr. Premises
of buying benefit Cr.
a house  extending Bank/Cash/
beyond Creditor
current
accounting
period
Expenditure Benefit Nature of Accounting
Expenditure Treatment
(c) Installation Long-term Capital Dr. Premises
of partition benefit Cr. Bank/Cash/
walls and  to prepare the
Creditor
lighting asset for
system in intended use
preparing
the flat for
use as an
office
Expenditure Benefit Nature of Accounting
Expenditure Treatment
(d) Renting a Short-term Revenue Dr. Rent
house benefit Cr. Bank/Cash/
 consumed
Creditor
within current
accounting
period
(e) Management Short-term Revenue Dr.
fee benefit Management
 consumed fee
within current Cr.
accounting Bank/Cash/
period Creditor
Capital Income
It is the income from the sale of a fixed asset or asset which was not
acquired for resale.
Example
◦ Profit on disposal of machinery
◦ Realization of goodwill
Revenue Income
It is the income form the sale of trading stock or goods acquired for
resale.
Example
◦ Sale of trading goods
◦ Rental income of a property company
Accounting Treatment
Revenue Income
This is normal trading income, and will be credited to Trading Account.

Trading Account
$

Sales X
Capital Income
This is non-trading income, and will be credited to Profit and Loss
Account.

Profit and Loss Account

$

Gross Profit b/f X

Profit on Disposal X
Revaluation
A fixed asset should be recorded at cost less
depreciation.
The value of an asset in reality is increasing as a
result of inflation, which may be significantly
greater than its historical cost stated in the balance
sheet.
 Revaluation Profit
When the market value of an asset is greater than its historical cost, the
increase in value should be:

Dr. Non Current Asset

With the rise in value
Cr. Revaluation Reserve

It is NOT to be treated as an income in the Profit and Loss

Account
 Revaluation Loss
When the market value is smaller than the historical cost, the decrease
in value can be treated in two ways:
If the asset had been revalued before, and a revaluation reserve has
been established:

Dr. Revaluation Reserve With the decrease in

Cr. Fixed Asset value
 • If the loss cannot be covered by any reserve
arising from the previous revaluation of the
same asset:

Dr. Profit and Loss Account

With the decrease in
value
Cr. Fixed Asset
 TERMS
Property, plant and equipment – tangible assets held for
use in the production or supply of goods and services, for
rental to others and for administrative purposes, which are
expected to be used for more than period of more than
one year
Depreciation – the systematic allocation of the
depreciable amount of an asset over its useful life
Depreciable amount – the cost or valuation of the asset,
less any residual amount
Useful life – the length of time, or number of units of
production, for which an asset is expected to be used
TERMS
Residual value – the net amount the entity expects to
obtain for an asset at the end of its useful life, after
deducting the expected costs of disposal
Fair value – the amount for which an asset could be
exchanged between knowledgeable, willing parties in an
arm’s length transaction
Carrying amount – the amount at which an asset is
recognised in the statement of financial position, after
deducting any accumulated depreciation and impairment
los