What you'll learn
Depreciation of non-current assets forms a core component of CIE IGCSE Accounting Paper 1 and Paper 2 examinations. This topic examines how businesses systematically allocate the cost of fixed assets over their useful economic lives. Candidates must demonstrate proficiency in calculating depreciation using different methods, recording transactions in ledger accounts, and understanding the impact on financial statements.
Key terms and definitions
Non-current assets — resources owned by a business expected to provide economic benefit for more than one accounting period, such as machinery, vehicles, and buildings.
Depreciation — the systematic allocation of the depreciable amount of a non-current asset over its useful life, representing the measure of wearing out, consumption or loss of value.
Residual value (scrap value) — the estimated amount that a business would currently obtain from disposal of the asset, after deducting estimated costs of disposal, if the asset were already of the age and condition expected at the end of its useful life.
Useful life — the period over which an asset is expected to be available for use by the business, or the number of production units expected to be obtained from the asset.
Net book value (carrying amount) — the cost of the asset less accumulated depreciation to date; this represents the value of the asset shown in the Statement of Financial Position.
Provision for depreciation — an accumulated total of all depreciation charged on an asset since its purchase; also referred to as accumulated depreciation.
Straight-line method — a depreciation method that allocates equal amounts of depreciation expense to each year of an asset's useful life.
Reducing balance method — a depreciation method that applies a fixed percentage rate to the reducing net book value of an asset each year, resulting in decreasing depreciation charges over time.
Core concepts
Why businesses depreciate assets
Depreciation serves multiple accounting purposes in CIE IGCSE Accounting:
- Matching principle — depreciation matches the cost of using an asset against the revenue it helps generate in each accounting period
- Accurate asset valuation — shows a realistic value of assets in the Statement of Financial Position rather than historical cost
- Replacement planning — systematic depreciation charges help businesses plan for eventual asset replacement
- True profit measurement — ensures the Income Statement reflects genuine profit by including depreciation as an expense
Land is the only non-current asset that typically does not depreciate, as it does not wear out or lose value through use.
The straight-line method of depreciation
This method charges equal amounts of depreciation each year throughout the asset's useful life. The formula used in CIE IGCSE Accounting examinations:
Annual Depreciation = (Cost − Residual Value) ÷ Useful Life in years
Alternatively expressed as:
Annual Depreciation = Cost × Percentage per annum
Where the percentage = (100 ÷ useful life in years)%
The straight-line method produces:
- Constant annual depreciation charge
- Linear decline in net book value
- Simple calculations ideal for assets with consistent usage patterns
- Equal expense allocation across accounting periods
The reducing balance method of depreciation
This accelerated depreciation method applies a fixed percentage to the diminishing net book value each year. The formula:
Annual Depreciation = Net Book Value at start of year × Percentage rate
Characteristics of the reducing balance method:
- Higher depreciation charges in early years when asset efficiency is greatest
- Decreasing depreciation amounts annually
- Never reduces the asset value to zero (mathematically approaches residual value)
- More realistic for assets like vehicles and technology that lose value rapidly initially
- Commonly tested at 20%, 25%, or 40% rates in CIE examinations
Ledger account entries for depreciation
CIE IGCSE Accounting requires candidates to record depreciation using the double-entry system across three accounts:
1. Income Statement (Profit and Loss Account)
- Depreciation appears as an expense
- Debit entry: Depreciation expense
- Located in the expenses section
- Reduces net profit for the period
2. Provision for Depreciation Account
- Accumulates all depreciation charged over the asset's life
- Credit entry for depreciation charged
- Balance carried down increases annually
- Appears as a separate account for each asset type
3. Non-Current Asset Account
- Records original cost of asset at debit side
- Cost remains unchanged (unless disposal occurs)
- No depreciation entries made directly to this account
- Balance represents historical cost
The journal entry for depreciation:
| Account | Debit | Credit |
|---|---|---|
| Income Statement (Depreciation expense) | ✓ | |
| Provision for Depreciation Account | ✓ |
Presentation in financial statements
Statement of Financial Position presentation:
Non-current assets section shows:
- Cost of asset (at historical cost)
- Less: Provision for depreciation (accumulated total)
- Equals: Net Book Value
Example format tested in CIE examinations:
Motor Vehicles at cost 15,000
Less: Provision for depreciation (6,000)
Net Book Value 9,000
Income Statement presentation:
Depreciation appears as an expense, typically after gross profit calculation:
Gross Profit 45,000
Less: Expenses
Depreciation: Motor vehicles 3,000
Other expenses 12,000
Net Profit 30,000
Calculating net book value
Net book value represents the current value of an asset in accounting records. The calculation appears frequently in CIE IGCSE examinations:
Net Book Value = Cost − Accumulated Depreciation
After each year:
- Year 1 NBV = Cost − Year 1 depreciation
- Year 2 NBV = Year 1 NBV − Year 2 depreciation
- Continuing until disposal or end of useful life
The net book value under straight-line method decreases by the same amount annually. Under reducing balance method, net book value decreases by decreasing amounts each year.
Worked examples
Example 1: Straight-line depreciation calculation
Question: Khan Enterprises purchased equipment on 1 January 2020 for $24,000. The equipment has an estimated useful life of 5 years and a residual value of $4,000.
Calculate: (a) The annual depreciation charge [2 marks] (b) The net book value at 31 December 2022 [3 marks]
Solution:
(a) Annual depreciation = (Cost − Residual Value) ÷ Useful Life = ($24,000 − $4,000) ÷ 5 years = $20,000 ÷ 5 = $4,000 per annum [2 marks]
(b) Accumulated depreciation after 3 years = $4,000 × 3 = $12,000 [1 mark] Net Book Value = Cost − Accumulated Depreciation [1 mark] = $24,000 − $12,000 = $12,000 [1 mark]
Example 2: Reducing balance method
Question: A business purchased a delivery vehicle for $18,000 on 1 January 2019. Depreciation is charged at 25% per annum using the reducing balance method.
Prepare the Provision for Depreciation Account for the years ended 31 December 2019 and 2020. [6 marks]
Solution:
Year 2019 depreciation: $18,000 × 25% = $4,500 [1 mark] Year 2020 NBV start: $18,000 − $4,500 = $13,500 Year 2020 depreciation: $13,500 × 25% = $3,375 [1 mark]
Provision for Depreciation — Delivery Vehicle Account
| Date | Details | $ | Date | Details | $ |
|---|---|---|---|---|---|
| 31 Dec 2019 | Balance c/d | 4,500 | 31 Dec 2019 | Income Statement | 4,500 |
| 1 Jan 2020 | Balance b/d | 4,500 | |||
| 31 Dec 2020 | Balance c/d | 7,875 | 31 Dec 2020 | Income Statement | 3,375 |
| 1 Jan 2021 | Balance b/d | 7,875 |
[4 marks: 1 mark for each year's Income Statement entry, 1 mark for each year's balance c/d calculation]
Example 3: Change in depreciation method
Question: Martinez Ltd owns machinery with a cost of $30,000. On 1 January 2021, the provision for depreciation stood at $12,000. The business has been using the straight-line method charging $3,000 per annum, but decides to change to the reducing balance method at 20% per annum from 1 January 2021.
Calculate the depreciation charge for the year ended 31 December 2021. [2 marks]
Solution:
Net Book Value at 1 January 2021 = $30,000 − $12,000 = $18,000 [1 mark] Depreciation for 2021 = $18,000 × 20% = $3,600 [1 mark]
Common mistakes and how to avoid them
Mistake: Applying the depreciation percentage to the original cost every year when using the reducing balance method. Correction: Always apply the percentage to the net book value at the start of each year (cost minus accumulated depreciation), not the original cost.
Mistake: Forgetting to deduct residual value when calculating straight-line depreciation. Correction: The formula requires (Cost − Residual Value) ÷ Useful Life. Only the depreciable amount is allocated over the asset's life.
Mistake: Recording depreciation as a credit entry in the Income Statement. Correction: Depreciation is an expense and must always be debited to the Income Statement, with the corresponding credit entry in the Provision for Depreciation Account.
Mistake: Crediting depreciation directly to the asset account rather than the provision for depreciation account. Correction: The asset account maintains the original cost. Create a separate Provision for Depreciation Account to accumulate all depreciation charges.
Mistake: Calculating net book value as accumulated depreciation minus cost. Correction: Net Book Value = Cost minus Accumulated Depreciation (not the reverse).
Mistake: Depreciating land alongside buildings. Correction: Land does not depreciate in CIE IGCSE Accounting as it does not wear out. Only the building component is depreciated; land is recorded at cost indefinitely.
Exam technique for Depreciation of Non-Current Assets
Command word "Calculate" requires numerical answers with workings. Show the formula first, substitute values, then calculate. Marks are often awarded for method even if the final answer contains errors. In 4-mark questions, expect 2 marks for method and 2 marks for correct figures.
Ledger account preparation typically awards 1 mark per correct entry (debit or credit), 1 mark for balances carried down, and 1 mark for brought down balances. Write neatly in columns, align figures precisely, and double-underline final balances. Always label accounts fully (e.g., "Provision for Depreciation — Motor Vehicles Account" not just "Depreciation Account").
Statement of Financial Position extracts require proper format with clear labeling. Present assets at cost first, subtract provision for depreciation as a separate line (in brackets or with "Less:"), then show net book value. Marks are awarded for correct headings, correct figures, and proper subtraction presentation.
Part-year depreciation appears regularly in Paper 2. When an asset is purchased mid-year, calculate a proportional charge: Annual depreciation × (months owned ÷ 12). Read dates carefully and count months precisely. The financial year end determines the proportion to charge.
Quick revision summary
Depreciation systematically allocates asset cost over useful life. The straight-line method charges equal annual amounts using (Cost − Residual Value) ÷ Years. The reducing balance method applies a fixed percentage to diminishing net book value each year, giving higher early charges. Record depreciation by debiting Income Statement and crediting Provision for Depreciation Account; never alter the asset cost account. Net Book Value equals Cost minus Accumulated Depreciation. Present non-current assets showing cost, less provision for depreciation, equals NBV in the Statement of Financial Position. Land never depreciates.