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

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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assets, used in the same way, which are now at the end of their useful lives. Any expected costs of 

disposal should be offset against the gross residual value. For example: 

(a) 

A non-current asset costing $20,000 which has an expected life of five years and an expected 

residual value of nil should be depreciated by $20,000 in total over the five-year period. 

(b) 

A non-current asset costing $20,000 which has an expected life of five years and an expected 

residual value of $3,000 should be depreciated by $17,000 in total over the five-year period. 

4.5 Depreciation methods 

Depreciation is a means of spreading the cost of a non-current asset over its useful life in order to match 

the cost of the asset with the entity's consumption of the asset's economic benefits.  

So for each accounting period, depreciation is charged to the statement of profit or loss and also 

deducted from the non-current asset balance to give the asset's carrying amount.  

The amount of depreciation deducted from the cost of a non-current asset to arrive at its carrying 

amount will accumulate over time, as more depreciation is charged in each successive accounting 

period.  

For example, if a non-current asset costing $40,000 has an expected life of four years and an estimated 

residual value of nil, it might be depreciated by $10,000 per annum. 

 Depreciation 

charge for the 

year (statement 

of profit or loss) 

Accumulated 

depreciation 

at end of year 

 

Cost of the 

asset 

 

Carrying 

amount at end 

of year 

 

(A) 

(B) 

(C) 

(C – B) 

 

 $      

 $      

 $      

 $      

At beginning of its life 

 – 

 – 

 40,000 

 40,000 

Year 1 

 10,000 

 10,000 

 40,000 

 30,000 

Year 2 

 10,000 

 20,000 

 40,000 

 20,000 

Year 3 

 10,000 

 30,000 

 40,000 

 10,000 

Year 4 

 10,000 

 40,000 

 40,000 

 0 

 

 40,000 

 

 

 

At the end of year 4, the full $40,000 of depreciation charges have been made in the statements of 

profit or loss of the four years. The carrying amount of the non-current asset is now nil. In theory 

(although perhaps not in practice) the business will no longer use the non-current asset, which now 

needs replacing. 

There are several different methods of depreciation. For your syllabus, you only need to know about the 

straight line and the reducing balance methods.  

4.6 The straight line method 

This is the most commonly used method of all. The total depreciable amount is charged in equal 

instalments to each accounting period over the expected useful life of the asset. In this way, the carrying 

amount of the non-current asset declines at a steady rate, or in a 'straight line' over time. 

The annual depreciation charge is calculated as: 

–

Cost of asset   residual value

Expected useful life of the asset

 

4.7 Example: straight line depreciation  

(a) 

A non-current asset costing $20,000 with an estimated life of ten years and no residual value 

would be depreciated at the rate of:  

$20,000

10 years

 = $2,000 per annum 

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CHAPTER 8  

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  TANGIBLE NON-CURRENT ASSETS