Depreciation and disposals
Straight-line and reducing balance methods, the journal, and profit or loss on disposal.
ACCA exams this helps with: FA Financial Accounting See the ACCA map
New to this topic?
What it is: Depreciation spreads the cost of a long-term asset over the years it is used.
Why you need it: A van used for 5 years helps the business earn money in all 5 years. So each year should show part of its cost as an expense, not the whole cost in year 1.
What you do (straight-line method): (Cost − Residual value) ÷ Useful life = the depreciation expense each year. Take the total depreciation so far away from the cost. The result is the net book value (NBV).
Example. A van costs £10,000. It will be used for 5 years and then scrapped for £0. Depreciation = (£10,000 − £0) ÷ 5 = £2,000 each year. After 2 years, NBV = £10,000 − £4,000 = £6,000.
Key words
- Non-current asset
- An asset the business keeps and uses for more than a year, such as buildings, machinery or vehicles.Example: A delivery van used for 5 years.
- Depreciation
- Spreading the cost of a physical long-term asset, such as a van or machine, as an expense over the years it is used.Example: A £10,000 van used for 5 years and then worth nothing: straight-line depreciation is £2,000 each year.
- Residual value
- The amount an asset is expected to be worth at the end of its useful life.Example: Machinery costs £20,000 and is expected to sell for £2,000 after 5 years. The residual value is £2,000.
- Net book value (NBV)
- An asset’s cost minus all the depreciation charged on it so far. It is the value shown in the accounts.Example: A van cost £12,000 and has £3,000 of depreciation, so its net book value is £9,000.
Learn
Depreciation spreads the cost of a long-term asset (a non-current asset) over the years the business uses it. Each year gets a share of the cost as an expense.
Method 1: Straight-line
The residual value is what the asset will be worth at the end. The useful life is the number of years it will be used. The expense is the same every year.
Example: A machine costs £12,000. It will be used for 5 years and sold for £2,000. Depreciation = (£12,000 − £2,000) ÷ 5 = £2,000 each year.
Method 2: Reducing balance
Do not use the residual value. The expense gets smaller every year. It is used for assets that lose most of their value early, such as cars.
Example: A car costs £20,000. The rate is 25%. Year 1: 25% × £20,000 = £5,000. The net book value is now £15,000. Year 2: 25% × £15,000 = £3,750.
How to record it
Debit Depreciation expense. Credit Accumulated depreciation. The asset account stays at its original cost. Accumulated depreciation is the total depreciation charged so far.
Selling the asset (disposal)
Example: The NBV is £4,000. The asset is sold for £3,000. £3,000 − £4,000 = a loss of £1,000.
Watch it explained
Press play to watch the animation, or step through it at your own pace with the arrows.
Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. They may use slightly different terms, for example “owner’s equity” instead of “capital”.
Worked example
A van costs £12,000, has a residual value of £2,000 and a useful life of 4 years.
Straight-line: (£12,000 − £2,000) ÷ 4 = £2,500 a year.
Reducing balance at 25%:
| Year | Opening NBV £ | Charge £ | Closing NBV £ |
|---|---|---|---|
| 1 | 12,000 | 3,000 | 9,000 |
| 2 | 9,000 | 2,250 | 6,750 |
| 3 | 6,750 | 1,688 | 5,062 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Depreciation expense | 2,500 | |
| Accumulated depreciation | 2,500 | |
| (Year 1 straight-line depreciation on the van) | ||
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.