ACCA Applied Knowledge · Financial Accounting

Depreciation: formula sheet

Full chapter guide

Key formulas

Cost of an asset: Cost = purchase price (net of trade discount) + import duties and non-refundable taxes + directly attributable costs; Include delivery, installation and testing. Exclude general overheads, training and administration costs.
Depreciable amount: Depreciable amount = Cost − Residual value; This is the total amount to charge to profit or loss over the useful life.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; Also called net book value. It is not market value. Impairment losses are also deducted if there are any.
Straight-line annual charge: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Gives an equal charge each full year.
Depreciation journal: Dr Depreciation expense (profit or loss); Cr Accumulated depreciation (statement of financial position); Do not credit the asset cost account.
Depreciable amount: Cost − residual value; Used in straight-line and units of production. Reducing balance applies its rate to carrying amount, not to this figure.
Straight-line annual charge: (Cost − residual value) ÷ useful life in years; Same charge every full year. Adjust for part years if the question says so.
Reducing balance annual charge: Rate % × carrying amount at start of the year; Carrying amount = cost − accumulated depreciation. Residual value is not deducted first; the rate already allows for it.
Units of production charge: (Cost − residual value) ÷ total expected units × units used in the year; Total expected units might be hours, kilometres or output.
Carrying amount: Cost − accumulated depreciation; This is the figure shown in the statement of financial position.
Annual depreciation journal: Dr Depreciation expense; Cr Accumulated depreciation; Made each year for each asset class. Same entry whatever the method.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; This is the figure shown in the statement of financial position.
Straight-line charge: (Cost − Residual value) ÷ Useful life; Use when the question says straight-line. Adjust for part years if told to.
Reducing balance charge: Depreciation = Rate × Opening carrying amount; Apply the rate to carrying amount, not cost.
Closing accumulated depreciation: Opening balance + Charge for the year − Depreciation on disposals; Use this to build the ledger account balance.
Annual straight-line depreciation: (Cost − Residual value) ÷ Useful life in years; The starting point before any time apportionment.
Part-year depreciation: Annual charge × Months in use ÷ 12; Use for assets bought or sold during the year, if the policy is monthly.
Reducing balance part-year: Carrying amount × Rate % × Months ÷ 12; Rate applies to carrying amount, not cost. Apportion the year's charge.
Revised annual charge after change in estimate: (Carrying amount at date of change − New residual value) ÷ Remaining useful life; Remaining life is from the date of change, not from purchase.
IAS 8 treatment: Change in estimate = prospective, no restatement of prior years; Recognised in profit or loss in the current and future periods.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; Use accumulated depreciation up to the disposal date, including any part-year charge.
Profit or loss on disposal: Profit/(Loss) = Proceeds − Carrying amount; Positive means profit, negative means loss. Proceeds include any part-exchange allowance.
Disposal account (debit side): Dr Disposal: asset at cost; Journal: Dr Disposal, Cr Non-current asset (cost).
Disposal account (credit side): Cr Disposal: accumulated depreciation and proceeds; Journal: Dr Accumulated depreciation, Cr Disposal. Dr Bank (or receivable), Cr Disposal.
Part-exchange new asset cost: Cash paid = Cost of new asset − Part-exchange allowance; Record the new asset at its full price, not at the cash paid.
Revaluation surplus: Surplus = Fair value − Carrying amount before revaluation; Carrying amount = cost − accumulated depreciation. Credit the revaluation surplus (OCI) if positive.
Revaluation journal (increase, asset with accumulated depreciation): Dr Asset (cost) with the cost adjustment; Dr Accumulated depreciation (eliminate it); Cr Revaluation surplus; A simple way: remove accumulated depreciation, restate the asset to fair value, and credit the difference to the surplus.
Depreciation after revaluation: Annual depreciation = Revalued amount ÷ Remaining useful life (straight-line, no residual value); Use the remaining life at the revaluation date, not the original total life.
Annual transfer of excess depreciation: Transfer = Depreciation on revalued amount − Depreciation on original cost; Dr Revaluation surplus, Cr Retained earnings. Optional policy in IAS 16, shown in equity only.
Surplus on disposal: Profit or loss = Proceeds − Carrying amount; then transfer remaining surplus to retained earnings; Use the revalued carrying amount. The transfer is within equity, not in profit or loss.

Quick revision

Depreciable amount = cost − residual value.
Straight-line charge = (cost − residual value) ÷ useful life.
Reducing balance charge = rate × opening carrying amount; residual value is not deducted first.
Carrying amount = cost − accumulated depreciation.
Journal: Dr Depreciation expense, Cr Accumulated depreciation.
Land is not normally depreciated; buildings are.
A change in useful life is a change in estimate: apply it from now on, with no restating of past years.
New carrying amount ÷ remaining life gives the revised annual charge.
Profit or loss on disposal = proceeds − carrying amount at disposal.
Charge depreciation up to the date of disposal if the company's policy says so.
A revaluation gain goes to the revaluation surplus in other comprehensive income, not to profit.
After revaluation, depreciate the new carrying amount over the remaining useful life.

Common mistakes

Saying depreciation shows the asset's current market value. Fix: Remember that depreciation is cost allocation. Carrying amount can be far above or below market value.
Deducting residual value from cost when asked for carrying amount at purchase. Fix: At purchase, carrying amount equals cost. Residual value only affects the amount to be depreciated.
Deducting residual value before applying the reducing balance percentage Fix: Apply the rate to the carrying amount only. Residual value is not part of the calculation.
Applying the reducing balance rate to original cost every year Fix: Use opening carrying amount: cost less accumulated depreciation to date.
Crediting the asset cost account with the depreciation charge. Fix: Credit accumulated depreciation. Keep the cost account at original cost.
Showing accumulated depreciation in the income statement. Fix: Only the year's expense goes in the income statement. The accumulated total goes in the statement of financial position.
Charging a full year's depreciation when the policy is monthly. Fix: Circle the purchase and disposal dates and the policy sentence before calculating.
Restating prior year depreciation after a change in useful life. Fix: A change in estimate is prospective under IAS 8. Only an error would restate prior periods.
Using cost instead of carrying amount Fix: Always deduct accumulated depreciation first. Profit or loss is measured against carrying amount.
Forgetting depreciation for the part year before disposal Fix: Check the policy. If depreciation is charged up to the disposal date, add the months held in the year of sale.

Exam tips

Learn the five IAS 16 terms as precise definitions. Objective tests often use them as answer options.
For depreciable amount, always subtract residual value. For carrying amount, always use accumulated depreciation.
Watch for distractors in cost: training, general overheads and trade discounts are common traps.
In concept questions, reject any option that says depreciation provides cash or measures market value.
Write the figure you calculated beside the question so you can check it against the exact term requested.
Look at the verb: charge for the year, accumulated depreciation and carrying amount are three different answers.
In reducing balance questions, write the carrying amount each year in a small list. It stops base errors.
In multiple response questions, check each statement against the rule: reducing balance gives higher early charges, straight-line gives equal charges.