Fixed percentage of the opening Net Book Value (NBV) each year.
Formula
\$\text{Depreciation for Year } n = \text{NBV}_{\text{start of year } n} \times \text{Depreciation Rate}\$
Journal entry (year‑end) – same as SL (adjust for entity type).
Numerical example (RB, 20 % rate)
Year
NBV at start (\$)
Depreciation (\$)
NBV at end ($)
1
15 000
3 000
12 000
2
12 000
2 400
9 600
3
9 600
1 920
7 680
4
7 680
1 536
6 144
5
6 144
1 229
4 915
4.3.3 Revaluation Method
Used when the fair value of an asset changes significantly during its useful life.
Determine the fair (revalued) amount on the revaluation date.
Calculate the accumulated depreciation that *should* have been recorded up to that date (using the chosen method).
Adjust the existing provision (or accumulated depreciation) to the new amount.
Record any increase in a Revaluation Reserve (equity). If the value falls, recognise a loss in the Profit‑and‑Loss Account, or draw down an existing reserve.
Journal entries – increase in value
Debit Fixed Asset (Revaluation) .......... XXX
Credit Revaluation Reserve ................. XXX
Journal entries – decrease in value
Debit Revaluation Reserve ................. XXX
Credit Fixed Asset (Revaluation) .......... XXX
Numerical example (Revaluation, straight‑line)
Delivery van: cost \$20 000, residual \$2 000, useful life 8 years.
Annual SL charge = (20 000 – 2 000) ÷ 8 = $2 250.
After 3 years, accumulated depreciation = 3 × 2 250 = $6 750.
Net Book Value before revaluation = 20 000 – 6 750 = $13 250.
Fair value at revaluation = \$14 000 → increase of \$750.
Credit Gain on Disposal ........................ 1 000 (if proceeds > NBV)
For a limited company the asset is credited directly (no provision) and the gain/loss is shown in the Profit‑and‑Loss Account.
4.4 Other Routine Year‑End Adjustments (Revenue Items)
Accrued expenses (e.g., wages payable)
Debit Expense .......... XXX
Credit Accrued Expenses ... XXX
Pre‑paid expenses (e.g., insurance paid in advance)
Debit Pre‑paid Expense ... XXX
Credit Cash/Bank .......... XXX
At year‑end:
Debit Expense .......... XXX
Credit Pre‑paid Expense ... XXX
Provision for doubtful debts
Debit Bad Debt Expense .......... XXX
Credit Provision for Doubtful Debts ... XXX
Inventory valuation – lower of cost and NRV
If NRV < Cost:
Debit Cost of Goods Sold .......... XXX
Credit Inventory .................. XXX
5. Preparation of Financial Statements (Syllabus Unit 5)
5.1 Sole Trader
Profit & Loss Account – includes Depreciation Expense (or the provision) as an operating expense.
Statement of Financial Position – Fixed Assets shown at cost less Provision for Depreciation. Revaluation surplus appears under Revaluation Reserve (equity).
All adjustments are made after the trial balance but before the final accounts are drafted.
5.2 Partnership
Depreciation treatment identical to a sole trader (provision contra‑asset).
Profit is divided between partners after all adjustments.
Balance Sheet shows each partner’s capital account, plus any revaluation reserve.
5.3 Limited Company
Depreciation is recorded as Depreciation Expense and the asset is credited directly (Accumulated Depreciation is not shown as a separate contra‑asset).
Revaluation surplus is shown in “Revaluation Reserve” within shareholders’ equity.
Adjustments are summarised in an “Adjustments to Trial Balance” schedule before the final accounts.
5.4 Updating the Trial Balance – Example (Sole Trader, Straight‑Line, Year 1)
Original Trial Balance (excerpt)
-----------------------------------------
Account Dr Cr
Depreciation Expense 0
Provision for Depreciation 0
Machinery (Fixed Asset) 12 000
-----------------------------------------
Adjustment (SL, Year 1)
-----------------------------------------
Debit Depreciation Expense .......... 2 000
Credit Provision for Depreciation ... 2 000
-----------------------------------------
Adjusted Trial Balance (excerpt)
-----------------------------------------
Account Dr Cr
Depreciation Expense 2 000
Provision for Depreciation 2 000
Machinery (Fixed Asset) 12 000
-----------------------------------------
5.5 Sample Final Accounts (Sole Trader)
Profit & Loss Account (excerpt)
Revenue & Gains
£
Sales
45 000
Less: Cost of Goods Sold
27 000
Gross Profit
18 000
Depreciation Expense
2 000
Net Profit for the year
16 000
Statement of Financial Position (excerpt)
Non‑Current Assets
£
Machinery (cost)
12 000
Less: Provision for Depreciation
(2 000)
Net Book Value
10 000
Revaluation Reserve
750
6. Exam Checklist – What Examiners Look For
Read the question carefully and identify the entity type (sole trader, partnership, limited company).
Choose the correct depreciation method from the wording (straight‑line, reducing‑balance, revaluation).
Show full working:
Cost, residual value, useful life, rate, or fair value as required.
Calculate the charge for each year (or for the revaluation date).
Prepare the appropriate journal entry:
Sole trader/partnership – Debit Depreciation Expense, Credit Provision for Depreciation.
Limited company – Debit Depreciation Expense, Credit Accumulated Depreciation (or directly credit the asset).
Revaluation – Debit/Credit Fixed Asset and Revaluation Reserve as shown.
Update the trial balance – ensure total debits = total credits after the adjustment.
Show the effect on the final accounts:
Depreciation expense reduces profit.
Asset’s carrying amount is reduced (or increased) on the Balance Sheet; any reserve appears under Equity.
For disposals, calculate gain/loss correctly and record the sale, removal of the asset, and any gain/loss.
Complete all other required year‑end adjustments (accrued, prepaid, doubtful debts, inventory) before drafting the final accounts.
Check the layout, headings and totals – the examiner awards marks for presentation as well as calculation.