Apply double-entry and GST principles to record the acquisition, depreciation (straight-line and reducing-balance) and disposal of non-current assets, and report carrying amount in the balance sheet

What this dot point is asking

QCAA wants you to manage the long-life resources of a sole-trader trading GST business. You must record the acquisition of a non-current asset at cost (with GST), allocate that cost as depreciation over its useful life using the straight-line and reducing-balance methods, maintain accumulated depreciation as a contra-asset, report carrying amount in the balance sheet, and account for disposal including the profit or loss on sale.

Acquisition

A non-current asset is recorded at cost: the GST-exclusive purchase price plus any costs needed to bring it into use (delivery, installation). GST is recovered through GST Clearing. Buying equipment for $22,000 including GST plus$1,100 installation including GST:

• Debit Equipment $21,000 (20,000 + 1,000 installation)
• Debit GST Clearing $2,100
• Credit Cash at Bank or Accounts Payable $23,100

Only GST-exclusive amounts capitalise into the asset; the GST is reclaimed.

Depreciation

Depreciation allocates the depreciable cost (cost minus residual value) over the asset's useful life, matching the expense to the revenue the asset helps earn. It is a non-cash expense and an estimate.

Straight-line method

Equal depreciation each period:

Depreciation per year = (cost - residual value) / useful life

For equipment costing $21,000 with a$1,000 residual and a 5-year life:

(21,000 - 1,000) / 5 = $4,000 per year

Reducing-balance method

A fixed percentage rate is applied to the carrying amount (cost minus accumulated depreciation), so the expense is larger in early years and smaller later. Residual value is not subtracted in the calculation; depreciation simply slows as the carrying amount falls. At a 30% rate on $21,000:

• Year 1: 30% x 21,000 = $6,300, carrying amount$14,700
• Year 2: 30% x 14,700 = $4,410, carrying amount$10,290
• Year 3: 30% x 10,290 = $3,087, carrying amount$7,203

Reducing-balance suits assets that lose value or productivity faster early in life (vehicles, technology). Straight-line suits assets used evenly over time (buildings, fixtures).

Recording depreciation

Whichever method is used, the entry is the same:

• Debit Depreciation $4,000
• Credit Accumulated Depreciation $4,000

Accumulated Depreciation is a contra-asset with a credit balance. It is not the same as the depreciation expense: the expense is the current period's allocation, while accumulated depreciation is the total to date.

Carrying amount

In the balance sheet, the asset is shown at carrying amount (also called book value):

Carrying amount = cost - accumulated depreciation

After two years of straight-line depreciation, the equipment shows cost $21,000 less accumulated depreciation$8,000, a carrying amount of $13,000. Carrying amount is an allocation figure, not a market value.

Disposal

When an asset is sold, the asset account and its accumulated depreciation are removed, and the proceeds are compared with the carrying amount. A disposal of asset account is used:

1. Transfer the asset at cost: debit Disposal, credit Equipment.
2. Transfer accumulated depreciation: debit Accumulated Depreciation, credit Disposal.
3. Record proceeds (with GST on sale): debit Cash at Bank, credit Disposal and GST Clearing.
4. The balance on the Disposal account is the profit (credit balance) or loss (debit balance) on disposal.

A profit on disposal arises when proceeds exceed carrying amount, meaning depreciation was charged too quickly; a loss means it was charged too slowly. Both are reported in the income statement and reflect the imprecision of estimating useful life and residual value.