I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

FORMULA TO LEARN 

New depreciation = 

Carrying amount – residual value

Revised useful life

 

 

Similar adjustments are made when there is a change in the expected residual value of the asset. For 

example, assume that the residual value was changed to $500 at the same time as the remaining useful 

life was revised. The new depreciation would then be (6,000 – 500)/5 = $1,100 per year. 

4.14 Depreciation is not a cash expense 

Depreciation spreads the cost of a non-current asset (less its estimated residual value) over the asset's 

life. The cash payment for the non-current asset will be made when, or soon after, the asset is 

purchased. Annual depreciation of the asset in subsequent years is not a cash expense – rather it 

allocates costs to those later years for a cash payment that has occurred previously. 

For example, a business purchased some shop fittings for $6,000 on 1 July 20X5 and paid for them in 

cash on that date. 

Subsequently, depreciation may be charged at $600 every year for ten years. So each year $600 is 

deducted from profits and the carrying amount of the fittings goes down, but no actual cash is being 

paid. The cash was all paid on 1 July 20X5. So annual depreciation is not a cash expense, but rather an 

allocation of the original cost to later years. 

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CHAPTER 8  

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  TANGIBLE NON-CURRENT ASSETS