How do we spread the cost of a non-current asset over the years it is used?
The purpose of depreciation, the straight-line and reducing-balance methods, the calculation and recording of depreciation and accumulated depreciation, and the accounting for the disposal of non-current assets.
A focused answer to AQA A-Level Accounting 3.1, covering the purpose of depreciation, the straight-line and reducing-balance methods, the recording of depreciation and accumulated depreciation, and the accounting for the disposal of non-current assets.
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What this dot point is asking
AQA wants you to explain why depreciation is charged, calculate it using the straight-line and reducing-balance methods, record depreciation and accumulated depreciation, and account for the disposal of a non-current asset. This is unit 3.1.6, and disposal calculations with a profit or loss on sale are a frequent Paper 1 task.
Why depreciate
Depreciation exists because a non-current asset is used over several years to earn revenue, so charging its whole cost in the year of purchase would overstate that year's cost and understate later years' costs, breaching the matching concept. It also applies prudence by ensuring the asset is not carried at more than the value it can still deliver. The causes of depreciation include wear and tear, the passage of time (for leases), obsolescence (newer technology) and depletion (for mines and quarries).
The two methods
Choosing a method is a matching judgement. Straight-line suits assets that deliver even benefit across their life, such as fixtures or a building. Reducing-balance suits assets that lose most value early and may incur rising repairs later, such as vehicles and IT equipment; the falling depreciation charge and the rising repair cost combine to give a more even total expense over the asset's life. Whichever method is chosen, the consistency concept requires it to be applied to that class of asset each year unless there is good reason to change.
Recording depreciation
The annual charge is debited to a depreciation expense in the income statement and credited to accumulated depreciation, a separate contra-asset account. The asset itself stays in the books at its original cost; the accumulated depreciation account grows each year and is deducted from cost on the statement of financial position to show the carrying amount (also called net book value). This split lets a reader see both the original investment and how much has been written off.
Recording a disposal
A profit or loss on disposal really means the depreciation charged was an estimate: a profit shows too much was charged over the asset's life, a loss shows too little. The estimate is corrected through the disposal account in the year of sale.
Try this
Q1. A van costs with no residual value and a four-year life. Calculate the straight-line charge. [2 marks] a year.
Q2. State how a profit on disposal is calculated. [1 mark] Sale proceeds minus the carrying amount at the date of disposal.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20187 marksA machine was bought for 4,000 and a useful life of four years, depreciated by the straight-line method. At the end of year three it was sold for $14,000. Calculate the annual depreciation charge, the carrying amount at the date of disposal, and the profit or loss on disposal.Show worked answer →
A full worked disposal; marks are awarded for each calculation stage.
Annual charge: cost minus residual value over useful life, that is (40,000 - 4,000) divided by 4 = 9,000 per year (2 marks).
Accumulated depreciation after three years: 3 times 9,000 = 27,000. Carrying amount at disposal: 40,000 - 27,000 = 13,000 (2 marks).
Profit on disposal: sale proceeds minus carrying amount, 14,000 - 13,000 = 1,000 profit (2 marks). The final mark is for stating it is a profit because proceeds exceeded the carrying amount. Markers reward the residual-value deduction, the correct accumulated figure, and the proceeds-minus-carrying-amount comparison.
AQA 20215 marksCompare the straight-line and reducing-balance methods of depreciation and explain which is more appropriate for a delivery vehicle.Show worked answer →
A 5-mark "Compare and explain" answer needs the contrast plus a justified choice.
Straight-line charges an equal amount each year and suits assets that give even benefit over their life. Reducing-balance charges a fixed percentage of the falling carrying amount, so the charge is high early and lower later (2 marks for the contrast).
A delivery vehicle loses most value in its early years and may need rising repair costs later; reducing-balance better matches the high early depreciation with the high early value lost, and the rising repairs offset the falling depreciation to give a more even total expense (2 marks). The final mark is for a clear recommendation of reducing-balance with the matching-concept reason.
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Sources & how we know this
- AQA A-level Accounting (7127) specification — AQA (2017)