Depreciation of Non-Current Assets WACE Year 12 Accounting and Finance
“Calculate and record depreciation using the straight-line and reducing-balance methods, determine carrying amount, and record the disposal of a non-current asset including any profit or loss”
Depreciation spreads the cost of a non-current asset across its useful life. Straight-line charges an equal amount each year based on cost less residual value. Reducing-balance charges a fixed percentage of the falling carrying amount, so the expense is higher early on. Carrying amount equals cost less accumulated depreciation. On disposal, compare proceeds with carrying amount to find a profit or loss on sale.
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What this dot point is asking
SCSA wants you to calculate depreciation by both methods, record the annual entry, find carrying amount, and account for disposal including any profit or loss.
Why we depreciate
Depreciation is the systematic allocation of the depreciable amount of a non-current asset over its useful life. The depreciable amount is the asset's cost less its estimated residual value. It is an application of the accrual basis, matching the asset's cost against the revenue it helps earn.
Straight-line method
An equal charge each period:
A machine costing $50 000 with a $5 000 residual and a 5-year life depreciates by:
Reducing-balance method
A fixed percentage applied to the carrying amount (cost less accumulated depreciation to date). The same machine at 30 per cent:
- Year 1: 30% of 15 000; carrying amount $35 000
- Year 2: 30% of 10 500; carrying amount $24 500
- Year 3: 30% of 7 350; carrying amount $17 150
Reducing-balance suits assets that lose value or productivity quickly early in life, such as vehicles and computers. Straight-line suits assets used evenly over time, such as buildings and fittings. Both spread the same total over the asset's life; they differ only in timing.
The annual entry under either method is: debit Depreciation Expense, credit Accumulated Depreciation. Depreciation Expense is closed to the Income Statement each year, while Accumulated Depreciation is a contra-asset that builds up over the asset's life and is shown as a deduction from the asset's cost on the Balance Sheet.
Why accumulated depreciation is a contra-asset
It is important to see that the credit goes to Accumulated Depreciation, not directly to the asset account. The asset stays in the ledger at its original cost, and the contra-asset accumulates the total written off to date. This preserves both pieces of information for the reader: the historical cost (useful for the conceptual framework's reliability) and the consumed portion. The difference between them is the carrying amount.
. Carrying amount is sometimes called book value or written-down value. It is never the asset's market value or what it could be sold for; depreciation is an allocation of cost, not a valuation exercise.
A common SCSA presentation in the Balance Sheet sets the asset out in three columns: cost, less accumulated depreciation, equals carrying amount. For the machine after two years of straight-line depreciation, this reads cost , less accumulated depreciation , carrying amount .
Depreciation and the matching principle
Depreciation exists because a non-current asset helps earn revenue over many periods, not just the period it is bought. Expensing the whole cost in the year of purchase would overstate that year's expenses and understate every later year's. By spreading the depreciable amount across the useful life, depreciation matches the cost of using the asset against the revenue it helps generate, satisfying the accrual basis. The estimates of useful life and residual value are judgements, which is why the conceptual framework's qualitative characteristics of relevance and faithful representation both apply.
Disposal of a non-current asset
To dispose, transfer the asset's cost and its accumulated depreciation to a Disposal account, record the proceeds, and the balancing figure is the profit or loss.
A loss arises when proceeds are below carrying amount; a profit when they exceed it.
A vehicle cost $40 000 and has accumulated depreciation of $28 000. It is sold for $15 000 cash.
Step 1: Find the carrying amount
The carrying amount is the amount still carried on the books after all depreciation charged to date. It tells you what the business still "has" in the books for this asset, and is the benchmark against which proceeds are compared.
Step 2: Calculate the profit on sale
Because the $15 000 proceeds exceed the $12 000 carrying amount, a profit on sale arises. This profit appears in the Income Statement as a non-operating gain: it is not cash profit in the usual trading sense, but rather evidence that the vehicle was depreciated more than it lost in value.
Step 3: Record the disposal entries
The Disposal account gathers the three sides of the transaction and the balancing figure becomes the profit or loss. Each entry below removes a balance from the books or records the cash inflow.
- Transfer cost: debit Disposal $40 000, credit Vehicle $40 000
- Transfer accumulated depreciation: debit Accumulated Depreciation $28 000, credit Disposal $28 000
- Record proceeds: debit Bank $15 000, credit Disposal $15 000
- Close the profit: debit Disposal $3 000, credit Profit on Sale $3 000
Step 4: Verify
The Disposal account must close to zero once all entries are posted. Checking that the credits and debits balance confirms no arithmetic error:
Final answer: The carrying amount was $12 000, proceeds were $15 000, and the profit on sale is $3 000.
Students sometimes calculate profit or loss as proceeds less the original cost, ignoring depreciation already charged. The comparison must be against the carrying amount (cost less accumulated depreciation), not the original cost. Using cost would wrongly turn most disposals into large losses.
Exam-style questions
Questions in the style of SCSA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
WACE 2021-style8 marksCoast Couriers buys a delivery van on 1 July for $48 000. It has an estimated residual value of $8 000 and a useful life of 4 years. Calculate the depreciation expense for the first two years under both the straight-line method and the reducing-balance method at 40 per cent, and state the carrying amount at the end of Year 2 under each method. Show your working.Show worked answer →
An 8 mark calculation needs both methods, two years each, and the carrying amounts.
Straight-line. Annual charge per year. Year 1 expense , Year 2 expense . Carrying amount at end of Year 2 .
Reducing-balance at 40 per cent (applied to carrying amount, ignore residual). Year 1 ; carrying amount . Year 2 ; carrying amount .
Markers reward the correct straight-line formula using residual, the reducing-balance percentage applied to the falling carrying amount (not cost), accurate arithmetic, and both closing carrying amounts.
WACE 2023-style6 marksA machine costing $60 000 with accumulated depreciation of $44 000 is sold for $13 000 cash. Record the disposal and explain whether a profit or loss arises and why it does not represent a cash flow.Show worked answer →
A 6 mark response needs the carrying amount, the result, the entries, and the explanation.
Carrying amount . Proceeds of are below carrying amount, so there is a loss on sale .
Disposal entries. Transfer cost (debit Disposal , credit Machine ), transfer accumulated depreciation (debit Accumulated Depreciation , credit Disposal ), record proceeds (debit Cash , credit Disposal ). The balancing debit is the loss on sale, reported in the Income Statement.
The loss is not a cash outflow. The only cash effect is the received; the loss simply records that the asset's remaining book value exceeded what the market paid. Markers reward the carrying amount, the loss figure, correct disposal entries, and the non-cash point.