Provisions for depreciation of

non-current Assets
 MEANING OF DEPRECIATION

Depreciation is an estimate of the loss

in value of a non-current assets over its
expected working life.
Causes of Depreciation:
Depreciation is the value reduction in the carrying amount of the fixed
asset (or property plant & equipment) from period to period which is
charged in the statement of profit & loss of organization for the same
period to provide the reasonable cost of the asset which has been used
during that period. Common causes of depreciation include wear and
tear due to usage, compliance to accounting standards, technological
advancements etc.
Methods of depreciation:

 Straight line method/ fixed installment

method
 Reducing balance method/ diminishing
balance method
 Revaluation method
STRAIGHT LINE METHOD OF DEPRECIATION

This is also known as the fixed installment

method, it requires that the same amount is
charged annually over the lifetime of non-
current asset.
STRAIGHT LINE METHOD:

FORMULA: Annual
depreciation charge =
Cost of Assets – Residual value____
Number of expected years of use
QUESTION
Sonya purchases a delivery van for $18000 on 1 January 2011. She
will use the van for four years, after which she estimates she will
be able to sell the van for $6000.
Required:
 Write the formula and calculate the annual depreciation charge
the straight line method.
 Answer:
Depreciation = Cost of Assets – Residual value____
Number of expected years of use

= $ 18 000 - $ 6000 / 4 years =$ 3000

REDUCING BALANCE METHOD

 This is also known as diminishing balance method. The amount of

depreciation is always calculated on the net book value.

 Net book value = cost of assets – depreciation

The value of assets can never fall to nil as depreciation is always
calculated on net book value
1. Ali’s financial year ends on 30 June. On 1st July 2003 he purchased
fixtures costing $25000. He estimated that he would be able to use the
fixtures for 4 years and be able to sell them for $3000.
Calculate the depreciation for 4 years using reducing balance method at the
rate of 40% per annum.
$
1st Year - Cost of fixture on 1 July 2003 25 000
(-) Depreciation (40 % on $25 000) : 30 June 2004 (10 000)
15 000

2nd Year - Net Book Value of fixture on 1 July 2004 15 000

(-) Depreciation ( 40% on 15 000) : 30 June 2005 (6 000)
9000

3rs Year - Net Book value of fixture on 1 July 2005 9000

(-) Depreciation ( 40% on 9 000) 30 June 2006 (3600)
5 400

4th Year - Net book value of fixture on 1 July 2006 5 400

(-) Depreciation ( 40% on 5400) 30 June 2007 (2160)
3 240
 Net book value of fixture on 30 June 2007 = $3 240
(-) Selling price = ($3 000)
Loss on sale of fixture = $240
 Plenary:
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