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

 

147 

QUESTION 

Depreciation

 

A 

What is the purpose of depreciation?   

B 

In what circumstances is the reducing balance method more appropriate than the straight line 

 method? Give reasons for your answer. 

ANSWER 

A 

The purpose of depreciation is to spread the cost of a non-current asset over its useful life in 

order to match the cost of the asset over the full period during which the business consumes 

economic benefits from the asset. Charging depreciation is an application of the accruals 

concept.  

B 

The reducing balance method of depreciation is used instead of the straight line method when it 

is considered fair to allocate a greater proportion of the total depreciable amount to the earlier 

years and a lower proportion to the later years, on the assumption that the benefits obtained by 

the business from using the asset decline over time. 

 

In favour of this method, it may be argued that it links the depreciation charge to the costs of 

maintaining and running the asset. In the early years these costs are low and the depreciation 

charge is high, while in later years this is reversed. 

 

4.15 Ledger entries for depreciation 

The ledger accounting entries for depreciation are as follows. 

(a) 

There is an accumulated depreciation account for each separate category of non-current assets; 

for example, plant and machinery, land and buildings, fixtures and fittings. 

(b) 

The depreciation charge for an accounting period is a charge against profit. It is accounted for as 

follows. 

DEBIT 

Depreciation expense (statement of profit or loss) 

CREDIT 

Accumulated depreciation account (statement of financial position) 

with the depreciation charge for the period. 

(c) 

The balance on the statement of financial position depreciation account is the total accumulated 

depreciation. This is always a credit balance brought forward in the ledger account for 

depreciation. 

(d) 

The non-current asset accounts are unaffected by depreciation. Non-current assets are recorded 

in these accounts at cost (or, if they are revalued, at their revalued amount). 

(e) 

In the statement of financial position of the business, the total balance on the accumulated 

depreciation account is set against the value of non-current asset accounts (ie non-current assets 

at cost or revalued amount) to derive the carrying amount of the non-current assets. 

This is how the non-current asset accounts might appear in a trial balance. 

 

Dr Cr 

 

$       

$       

Freehold building – cost 

2,000,000 

 

Freehold building – accumulated depreciation 

 

500,000 

Motor vehicles – cost 

70,000 

 

Motor vehicles – accumulated depreciation 

 

40,000 

Office equipment – cost 

25,000 

 

Office equipment – accumulated depreciation 

 

15,000 

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