IGC-L16: Depreciation
Calculating and recording depreciation using recognised accounting methods.
Learning Objectives
- Define depreciation
- Explain reasons for depreciation
- Calculate depreciation using straight-line method
- Calculate depreciation using reducing balance method
- Record depreciation in ledger accounts
Concept Framework
What is Depreciation?
Depreciation is the systematic allocation of the cost of a non-current asset over its useful life.
It is not a method of valuing assets.
It is a method of allocating cost.
Reasons for Depreciation
Wear and tear
Obsolescence
Passage of time
Depletion
Straight-Line Method
Depreciation =
(Cost – Residual Value) ÷ Useful Life
This method charges equal depreciation each year.
Reducing Balance Method
Depreciation =
Book Value × Fixed Percentage
Depreciation decreases each year as book value reduces.
Accounting Entries
Debit Depreciation Expense
Credit Accumulated Depreciation
Accumulated depreciation is deducted from the asset in the Statement of Financial Position.
Worked Examples
Example 1 — Straight-Line Method
Equipment cost £20,000
Residual value £2,000
Useful life 5 years
Depreciation per year:
(20,000 – 2,000) ÷ 5 = £3,600
Example 2 — Reducing Balance Method
Motor vehicle £15,000
Depreciation rate 20%
Year 1:
15,000 × 20% = £3,000
Book value end of Year 1 = £12,000
Year 2:
12,000 × 20% = £2,400
📌 Additional depreciation calculations and ledger treatment questions are available in the 🎯 Question Papers + YouTube Explanation section.
Structured Practice
Level 1 – Concept Check
Define depreciation.
State two causes of depreciation.
State one depreciation method.
Level 2 – Application Practice
An asset costs £25,000 with residual value £5,000 and useful life 4 years.
Calculate annual depreciation using straight-line method.
Level 3 – Examination Style Question
Explain why the reducing balance method may be more appropriate for certain assets. (6 marks)
📌 Additional structured depreciation questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured Errors and Suspense Account questions are available in the Question Papers and YouTube Explanation section. Students should practise journal corrections and Suspense Account preparation regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn – Unlearn – Relearn Approach
If you believe you have already mastered this topic, attempt the following without referring to notes.
If you are unable to answer confidently, revisit the lesson before proceeding.
An asset costing £30,000 has no residual value and a useful life of 6 years. Calculate straight-line depreciation.
An asset costing £40,000 is depreciated at 25% reducing balance. Calculate depreciation for Year 2.
Explain why depreciation is not treated as a cash expense.
How does depreciation affect net profit and capital?
Detailed Activity Solutions
Solution to Level 3 question
Solution to Structured Practice
(25,000 – 5,000) ÷ 4 = £5,000 per year
Solutions to Proficiency Check
Solutions to Proficiency Check
30,000 ÷ 6 = £5,000 per year
Year 1: 40,000 × 25% = £10,000
Book value = £30,000
Year 2: 30,000 × 25% = £7,500
Depreciation allocates cost; it does not involve cash payment.
Depreciation reduces net profit, which reduces capital.
Marking Logic
2 marks – Correct calculation
2 marks – Logical explanation
2 marks – Evaluation
How This Topic Appears in the Examination
This topic is commonly assessed in:
• Paper 2 depreciation calculations
• Ledger entries for accumulated depreciation
• Explanation questions comparing methods
Examiners frequently assess:
Correct formula application
Accurate calculation
Understanding of impact on profit
Students should practise depreciation calculations regularly and review video explanations for clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I can calculate straight-line depreciation
- I can calculate reducing balance depreciation
- I understand the impact on profit
- I can record depreciation correctly
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