Skip to content

ACCA Applied Knowledge · Financial Accounting

Depreciation for ACCA Financial Accounting: Chapter Guide

Depreciation spreads the cost of a non-current asset, less its residual value, over its useful life under IAS 16. You pick a method, usually straight-line or reducing balance, calculate the annual charge, post the journal, then adjust for part years, estimate changes, disposals and revaluations.

What this chapter covers

This chapter covers how a business charges the cost of a non-current asset to profit over the years it is used. IAS 16 Property, Plant and Equipment sets the rules. You learn what depreciation is, how to calculate it with two main methods, and how to record it in the ledger and the financial statements.

The chapter then deals with what happens when things change. You may buy an asset part way through the year, revise its useful life, sell it at a profit or loss, or revalue it upwards. Each situation has a fixed way of working, and the exam repeats them.

Depreciation connects to almost everything else in the Financial Accounting paper. It feeds the statement of profit or loss and the statement of financial position. It appears in the accounts preparation question, in incomplete records and in the consolidation question, where you adjust for it. It also links to the non-current asset register and to the reconciliations that check it.

Depreciation is a core part of Section A, where each objective test question is worth two marks, and it appears inside the 15-mark accounts preparation question in Section B. The calculations are short and rule-based, so careful practice turns them into reliable marks. Mistakes here also carry through to profit, asset values and equity, so one slip can cost marks in several parts of a question.

Depreciation: topics in the order to study them

  1. 1Depreciation Concepts and IAS 16 BasicsYou need the definitions, cost, residual value and useful life first, because every later calculation uses them.
  2. 2Depreciation Methods: Straight-Line and Reducing BalanceOnce you know the inputs, you learn the two formulas that produce the annual charge.
  3. 3Depreciation Journals and Ledger AccountingNext you record the charge, using the expense account and the accumulated depreciation account.
  4. 4Part-Year Depreciation and Changes in EstimatesThis builds on the methods by adding time apportionment and revised lives, which exam questions often combine.
  5. 5Disposal of Non-Current AssetsDisposals need the cost, accumulated depreciation and the depreciation to the date of sale, so they come after all of the above.
  6. 6Revaluation of Non-Current AssetsRevaluation is the most advanced idea, adding a revaluation surplus and a new depreciation base, so study it last.

How to prepare Depreciation

Treat this as a skills chapter. Learn each rule once, then practise until the working is automatic and you can do it on a phone-sized screen.

  1. Learn the key terms: cost, residual value, useful life, depreciable amount and carrying amount. Write each with its formula.
  2. Practise straight-line and reducing balance on five or six assets each, including one with a residual value, until you never forget to deduct it for straight-line.
  3. Write the journals from memory: debit depreciation expense, credit accumulated depreciation. Then post both to ledger accounts and extract the carrying amount.
  4. Do part-year questions by writing the months held on one line before calculating. Then revise a useful life and spread the remaining carrying amount over the remaining life.
  5. Practise disposals with a disposal account: cost on the debit side, accumulated depreciation and proceeds on the credit side, and the balancing figure as the profit or loss.
  6. Work through revaluation: carrying amount, new value, surplus to other comprehensive income and equity, then depreciation on the revalued figure over the remaining life.
  7. Finish with timed objective test questions. For number entry, check units and rounding. For multiple response, select exactly the stated number of answers.

Common mistakes in Depreciation

  • Forgetting to deduct residual value in straight-line depreciation.

    Fix: Always write cost − residual value on the first line of your working before you divide.

  • Deducting residual value before applying the reducing balance rate.

    Fix: Apply the percentage to the opening carrying amount only. Residual value is not part of the calculation.

  • Using the wrong number of months in a part-year charge.

    Fix: Read the policy first, count the months held, and write the fraction, such as 8 ÷ 12, before multiplying.

  • Calculating the disposal profit or loss from cost instead of carrying amount.

    Fix: Use a disposal account. Remove cost and accumulated depreciation, add proceeds, and read off the balancing figure.

  • Putting a revaluation gain through profit or loss.

    Fix: Remember that an upward revaluation goes to the revaluation surplus in equity through other comprehensive income.

  • Restating prior years after changing the useful life.

    Fix: Spread the carrying amount at the date of change over the remaining life, and leave earlier years unchanged.

Last-day revision: Depreciation

  • 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.

Depreciation practice questions

Depreciation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Depreciation: frequently asked questions

What is the difference between straight-line and reducing balance depreciation?

Straight-line charges the same amount every year, based on cost less residual value over useful life. Reducing balance charges a fixed percentage of the carrying amount at the start of each year, so the charge falls over time.

Is depreciation a source of cash?

No. Depreciation is a non-cash expense that allocates cost over time. It reduces profit and carrying amount, but no cash leaves the business when you record it.

How is a change in useful life treated?

It is a change in accounting estimate. You do not change past years. You take the carrying amount at the date of change, less any residual value, and spread it over the new remaining life.

Where does a revaluation surplus appear?

It is recognised in other comprehensive income and held in equity as a revaluation surplus. It is not included in profit for the year when the asset is revalued upward.

How should I approach depreciation questions in the computer-based exam?

Write the working on scratch paper in clear steps and check the stated rounding. For multiple response, choose exactly the number asked for. For number entry, double-check the sign and units before submitting.