Financial Accounting · Statement of profit or loss and other comprehensive income

Depreciation, Disposals and Irrecoverable Debts in Profit or Loss

Updated 11 October 2026 · Fact-checked

Depreciation is charged as an expense each year. A disposal gives a profit or loss equal to proceeds minus carrying amount. Irrecoverable debts are written off as an expense. Only the change in the allowance for receivables is charged or credited. Work out each figure separately, then post it to profit or loss.

Understand Depreciation, Disposals and Irrecoverable Debts in Profit or Loss

The statement of profit or loss shows income and expenses for the year. Four items cause most problems: depreciation, profit or loss on disposal, irrecoverable debts and the allowance for receivables. Each one adjusts the value of an asset and has a matching entry in profit or loss.

Depreciation spreads the cost of a non-current asset over its useful life. This follows the matching idea: the asset helps earn income over several years, so its cost is charged over those years. Each year you debit the depreciation expense and credit accumulated depreciation. The expense goes in profit or loss. The accumulated depreciation is deducted from cost in the statement of financial position.

Disposal happens when you sell or scrap an asset. First find the carrying amount, which is cost minus accumulated depreciation up to the disposal date. Compare it with the sale proceeds. If proceeds are higher, you have a profit. If lower, a loss. The result is not sales revenue. It is a gain or loss shown in profit or loss, often within other income or expenses.

Irrecoverable debts are receivables you do not expect to collect. You write them off. Debit irrecoverable debts expense and credit receivables. A debt recovered is cash received later from a debt already written off. It is credited to profit or loss.

The allowance for receivables covers debts that may not be paid. It is an estimate, set up after the write-offs. It is a credit balance that reduces receivables in the statement of financial position. Each year you only record the change. If the required allowance rises, charge the increase as an expense. If it falls, credit the decrease to profit or loss.

Key formulas to remember

Carrying amount: Carrying amount = Cost − Accumulated depreciation; Use accumulated depreciation up to the disposal date, following the depreciation policy for the year of disposal.
Straight-line depreciation: Annual charge = (Cost − Residual value) ÷ Useful life; Gives the same charge every full year.
Reducing balance depreciation: Annual charge = Rate % × Carrying amount at start of year; The charge falls each year because the carrying amount falls.
Profit or loss on disposal: Profit or (loss) = Proceeds − Carrying amount; A positive answer is a profit. A negative answer is a loss. It goes in profit or loss, not in revenue.
Irrecoverable debt write-off: Dr Irrecoverable debts expense, Cr Receivables; Do this before calculating the allowance.
Debt recovered: Dr Cash, Cr Irrecoverable debts expense (or receivables, then cash); Reduces the net expense in profit or loss.
Required allowance: Required allowance = % × (Trade receivables − Irrecoverable debts written off); Apply a general percentage only to the balance that remains after write-offs. Specific doubtful debts are allowed for separately in full.
Charge for the year for allowance: Profit or loss effect = Required allowance − Existing allowance; Positive means an increase, which is an expense. Negative means a decrease, which is a credit.

How to solve Depreciation, Disposals and Irrecoverable Debts in Profit or Loss questions

Use this order for any question. It stops you mixing up the statement of profit or loss and the statement of financial position.

1Read the policy: method, rate, residual value, and how to treat the year of purchase and the year of disposal.
2Calculate the depreciation charge for the year for each asset. Include a part-year charge only if the question says to.
3For a disposal, find accumulated depreciation to the date of disposal, then the carrying amount.
4Calculate profit or loss on disposal as proceeds minus carrying amount. Label it clearly as profit or loss.
5Write off irrecoverable debts. Deduct them from receivables. Treat any debt recovered as a credit to profit or loss.
6Calculate the required allowance on the reduced receivables figure. Subtract the existing allowance to get the change.
7Post each figure to profit or loss: depreciation and irrecoverable debts as expenses, the allowance change as an expense or credit, the disposal result as a gain or loss.
8Check the statement of financial position side: receivables less allowance, and cost less accumulated depreciation.

Quickest way: Four-line check for objective tests

When to use it: Use this in Section A multiple choice and number entry questions where you have about three minutes.

Write the four figures: depreciation, disposal result, write-offs, allowance change.
For disposals, jot cost, then accumulated depreciation, then carrying amount, then proceeds.
For allowances, jot receivables minus write-offs, multiply by the percentage, then subtract the old allowance.
Add expenses and subtract credits to reach the total effect on profit, then match it to an option and check the sign.

Common mistakes in Depreciation, Disposals and Irrecoverable Debts in Profit or Loss

Treating the whole allowance as the expense for the year.
Students forget that the allowance is a balance that carries forward.
Fix: Always subtract the existing allowance from the required allowance. Only the difference goes to profit or loss.
Applying the allowance percentage to receivables before deducting irrecoverable debts.
Students use the first receivables figure they see.
Fix: Write off the bad debt first. Then apply the percentage to the reduced balance.
Calculating disposal profit using cost instead of carrying amount.
The cost is the biggest number in the question.
Fix: Subtract accumulated depreciation first. Then compare proceeds with carrying amount.
Showing a disposal profit as part of revenue.
Students think any sale of an asset is a sale.
Fix: Show the profit or loss on disposal as a gain or loss in profit or loss, outside revenue and cost of sales.
Charging depreciation for the wrong period in the year of acquisition or disposal.
Students assume a policy instead of reading it.
Fix: Follow the stated policy exactly: full year, none, or time-apportioned by months.
Ignoring debts recovered or adding them to revenue.
The item appears as a small extra line and is easy to miss.
Fix: Credit it to profit or loss, reducing the net irrecoverable debts expense.

Worked examples

Example 1

A company bought a machine on 1 January 20X1 for $40,000. Depreciation is 25% a year straight line with no residual value. A full year is charged in the year of purchase and none in the year of disposal. The machine is sold on 31 March 20X3 for $23,000. Year end is 31 December. Calculate the profit or loss on disposal.

Show the solution

Annual depreciation = 25% × $40,000 = $10,000.
Years charged: 20X1 and 20X2 only, as no depreciation is charged in the year of disposal (20X3).
Accumulated depreciation = 2 × $10,000 = $20,000.
Carrying amount = $40,000 − $20,000 = $20,000.
Profit = Proceeds − Carrying amount = $23,000 − $20,000 = $3,000.

Answer: Profit on disposal of $3,000, credited to profit or loss for the year ended 31 December 20X3.

Example 2

At the year end, trade receivables are $200,000 before adjustments. An irrecoverable debt of $8,000 must be written off. A debt of $500 previously written off was recovered and is not yet recorded. The existing allowance for receivables is $5,000. The company wants an allowance of 4% of receivables after the write-off. Calculate the total net charge to profit or loss for irrecoverable debts and the allowance.

Show the solution

Receivables after write-off = $200,000 − $8,000 = $192,000.
Required allowance = 4% × $192,000 = $7,680.
Increase in allowance = $7,680 − $5,000 = $2,680. This is an expense.
Irrecoverable debts expense = $8,000 written off.
Debt recovered = $500 credit, which reduces the expense.
Net charge = $8,000 − $500 + $2,680 = $10,180.

Answer: The net charge to profit or loss is $10,180. In the statement of financial position, receivables are shown at $192,000 less the allowance of $7,680.

Exam tips

Read the depreciation policy for the year of purchase and the year of disposal before calculating anything.
In number entry questions, check whether you are asked for a profit, a loss, a carrying amount or the expense. Then check the sign.
In multiple response questions, select exactly the stated number. Wrong options often use cost instead of carrying amount or the full allowance instead of the change.
In Section B accounts preparation, do the working for each item on its own line. You can earn marks for correct method even if one figure is wrong.
Check the statement of financial position effect as well. Receivables less allowance and cost less accumulated depreciation should agree with your workings.

Practice questions from Statement of profit or loss and other comprehensive income

Depreciation, Disposals and Irrecoverable Debts in Profit or Loss in other exams

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

Depreciation, Disposals and Irrecoverable Debts in Profit or Loss: frequently asked questions

Where does profit or loss on disposal go in the statement of profit or loss?

It is shown in profit or loss as a gain or loss, usually within other income or other expenses. It is not part of revenue. The amount is proceeds minus carrying amount.

Is an increase in the allowance for receivables an expense?

Yes. If the required allowance is higher than the existing allowance, you charge the increase to profit or loss. If it is lower, you credit the decrease.

What is the difference between an irrecoverable debt and an allowance for receivables?

An irrecoverable debt is a specific debt you have decided will not be paid, so you write it off. An allowance covers debts that may not be paid and reduces receivables without removing any customer balance.

Does depreciation appear in the statement of financial position or profit or loss?

Both. The yearly charge is an expense in profit or loss. Accumulated depreciation is deducted from cost in the statement of financial position to give carrying amount.