Cambridge Syllabus Notes

4.2 Accounting for Depreciation and Disposal of Non‑Current Assets

What is Depreciation? 💡

Depreciation is the systematic allocation of the cost of a non‑current asset over its useful life. Think of it like a phone that loses value each year as you use it. Instead of writing off the whole cost in one year, you spread it out so the financial statements reflect the asset’s real value over time.

Formula: $depreciation = \frac{cost - residual\ value}{useful\ life}$

Why Do We Depreciate? 📉

Matches the asset’s cost with the profits it helps generate.
Shows the true value of the company’s assets on the balance sheet.
Helps in planning for future replacements or upgrades.
Required by accounting standards and exam questions.

Common Depreciation Methods 🧮

Straight‑Line (SL): Equal depreciation each year.
Reducing Balance (RB): Higher depreciation in early years.
Units of Production (UP): Based on actual usage or output.

Example: Straight‑Line Depreciation 📊

A company buys a delivery van for $30,000 with a residual value of $5,000 and an expected useful life of 5 years.

Year	Depreciation Expense	Accumulated Depreciation	Carrying Amount
1	$5,000	$5,000	$25,000
2	$5,000	$10,000	$20,000
3	$5,000	$15,000	$15,000
4	$5,000	$20,000	$10,000
5	$5,000	$25,000	$5,000

Notice how the depreciation expense is the same each year, but the carrying amount drops by $5,000 until it reaches the residual value.

Exam Tips for Depreciation Questions 🏷️

Always check the cost, residual value, and useful life given in the question.
Identify the method of depreciation required (SL, RB, UP).
Show your formula clearly; teachers love to see the steps.
Remember to calculate accumulated depreciation if asked for the carrying amount.
Use the exact figures from the problem; rounding too early can lead to errors.
For disposal questions, calculate the gain or loss by comparing the selling price to the carrying amount.

define depreciation