How is depreciation of non-current assets calculated and recorded, and how is the disposal of an asset accounted for?
Calculation and recording of depreciation using the straight-line and reducing-balance methods, the reasons for depreciating non-current assets, and the accounting treatment for the disposal of a non-current asset including any profit or loss on disposal.
A focused answer to the SQA Higher Accounting depreciation content, covering the straight-line and reducing-balance methods, why assets are depreciated, the accumulated depreciation and carrying value, and the accounting for the disposal of a non-current asset with any profit or loss.
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What this dot point is asking
The SQA wants you to calculate depreciation using both the straight-line and reducing-balance methods, explain why non-current assets are depreciated, record the charge correctly, and account for the disposal of an asset including any profit or loss. At Higher you must also be able to compare the two methods and justify which suits a given asset.
Why depreciate
A non-current asset such as machinery or a vehicle wears out, is used up, or becomes obsolete. Depreciation recognises this loss in value over the asset's life rather than all at once. It applies the accruals (matching) concept by charging part of the cost against the revenue the asset helps to earn each period, and it follows prudence by not overstating the asset's value. Depreciation is a non-cash expense; it does not move any money, it simply allocates a cost already paid.
The two methods
The straight-line method gives an equal charge every year, which suits assets that are used evenly and have a predictable life, such as fixtures. The reducing-balance method gives a higher charge in early years, which suits assets that lose value fastest when new and may also need more repairs as they age, such as vehicles, because the falling depreciation charge partly offsets rising repair costs to keep the total annual cost steadier.
Recording depreciation
The yearly charge is debited to the income statement as an expense and credited to the accumulated depreciation account. The accumulated depreciation account builds up year on year and is deducted from the asset's cost in the statement of financial position to show the carrying value. The asset stays at cost in its own account; only the accumulated depreciation grows.
Disposal of a non-current asset
When an asset is sold, you compare the proceeds with its carrying value at the date of sale.
The profit or loss arises because the estimates of useful life and residual value were not exactly right. A profit on disposal does not mean the asset was a good buy; it usually means it was depreciated a little too quickly.
Try this
Q1. An asset costs £15,000, residual value £3,000, life 4 years. Calculate the straight-line charge. [2 marks]
- Cue. (£15,000 - £3,000) / 4 = £3,000 per year.
Q2. State one reason why reducing-balance might suit a delivery van better than straight-line. [1 mark]
- Cue. A van loses most value when new, and the heavier early charge plus lighter later charge keeps the total annual cost steadier as repair costs rise.
Q3. An asset with carrying value £4,000 is sold for £3,200. State the profit or loss and its treatment. [2 marks]
- Cue. A loss on disposal of £800, charged as an expense in the income statement.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style5 marksA machine cost £40,000 with an estimated residual value of £4,000 and a useful life of 6 years. Calculate the annual depreciation under the straight-line method, and the carrying value at the end of year 2 under the reducing-balance method at 25% per year.Show worked answer →
Straight-line annual depreciation = (cost - residual value) / useful life = (£40,000 - £4,000) / 6 = £36,000 / 6 = £6,000 per year (2 marks).
Reducing-balance year 1 depreciation = 25% of £40,000 = £10,000, so carrying value at end of year 1 = £30,000 (1 mark).
Year 2 depreciation = 25% of £30,000 = £7,500, so carrying value at end of year 2 = £30,000 - £7,500 = £22,500 (2 marks). Markers reward the straight-line charge and both reducing-balance years.
SQA Higher style4 marksA van that cost £18,000 has accumulated depreciation of £13,000 when it is sold for £6,500. Calculate the carrying value at the date of sale and the profit or loss on disposal, and state how the profit or loss is treated in the income statement.Show worked answer →
Carrying value at disposal = cost - accumulated depreciation = £18,000 - £13,000 = £5,000 (1 mark).
Proceeds £6,500 exceed the carrying value of £5,000, so there is a profit on disposal = £6,500 - £5,000 = £1,500 (2 marks).
A profit on disposal is added as other income in the income statement (a loss would be an expense) (1 mark). Markers reward the carrying value, the profit figure and the correct treatment.
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Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)