Depreciation Methods and Journal Entries Checklist

Depreciation is one of the most frequently tested topics in financial accounting. Examiners test both the theoretical justification for writing down non-current assets and the practical mechanics of ledger accounts.

This revision guide breaks down the core depreciation methods, the standard journal entries, disposal procedures, and an exam-day checklist to ensure you never drop easy marks on this topic.

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1. What Is Depreciation and Why Is It Charged?

Depreciation is the systematic allocation of the depreciable amount of a non-current asset over its estimated useful economic life. It is an application of two fundamental accounting concepts:

• The Accrual (Matching) Concept: The cost of using an asset must be matched against the revenue that the asset helps generate in the same accounting period.
• The Prudence Concept: Non-current assets must not be overstated on the Statement of Financial Position, and profits must not be overstated on the Income Statement.

Key reminder: Depreciation is an internal bookkeeping adjustment, not a movement of cash. It does not set aside liquid funds to purchase replacement assets.

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2. Common Causes of Depreciation

Examiners often ask for reasons why assets lose value over time. Be ready to explain:

• Physical wear and tear: Normal friction, erosion, and degradation through day-to-day operational use.
• Economic or technical obsolescence: Newer, faster, or cheaper technology makes an existing machine inefficient or redundant.
• Passage of time (effluxion of time): Assets with fixed legal lifespans (such as leases, patents, or copyright licences) expire regardless of use.
• Depletion: The physical exhaustion of natural resources (such as quarries, mines, or oil reserves).

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3. The Three Main Depreciation Methods

For your non-current asset questions, you will generally be required to calculate depreciation using one of three standard methods.

A. Straight-Line Method (Fixed Instalment)

This method charges an equal amount of depreciation in each year of the asset's useful life. It suits assets that deliver consistent economic benefits year after year, such as buildings or office furniture.

$$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Estimated Residual Value}}{\text{Estimated Useful Life (years)}}$$

Alternatively, if a percentage rate is given:

$$\text{Annual Depreciation} = (\text{Cost} - \text{Residual Value}) \times \text{Depreciation Rate}$$

(Note: If no residual value exists, calculate the rate directly on cost.)

B. Reducing Balance Method (Diminishing Balance)

This method applies a constant percentage to the carrying amount (net book value) of the asset at the start of each accounting period. It produces higher depreciation charges in early years and lower charges in later years. It suits assets that provide higher efficiency and incur lower maintenance costs when new, such as motor vehicles and factory machinery.

$$\text{Depreciation Charge} = \text{Carrying Amount at Start of Year} \times \text{Depreciation Rate}$$

Where:
$$\text{Carrying Amount} = \text{Historical Cost} - \text{Accumulated Depreciation to Date}$$

(Crucial: Residual value is accounted for when setting the percentage rate; do not subtract residual value from the carrying amount before multiplying by the percentage.)

C. Units of Production / Revaluation Method

• Units of Production (Machine-Hour or Mileage): Charges depreciation based on physical usage rather than time.
  $$\text{Charge per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Expected Lifetime Units}}$$
• Revaluation Method: Best suited to loose tools, farm animals, or small workshop equipment where individual tracking is impractical.
  $$\text{Depreciation} = \text{Opening Valuation} + \text{Additions during Year} - \text{Closing Valuation}$$

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4. Depreciation Policies: Full Year vs. Proportionate

Always read the rubric of the question carefully to identify the business's policy on additions and disposals:

1. Full-year depreciation in year of purchase, none in year of sale: Simple to calculate. Ignore purchase or disposal dates. Charge a full 12 months on all assets owned at the year-end balance date.
2. Proportionate (month-by-month / pro-rata): Count the exact number of months an asset was owned during the financial year.
   $$\text{Charge} = \text{Annual Depreciation} \times \frac{\text{Months Owned}}{12}$$

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5. Master the Journal Entries

Double-entry discipline prevents careless errors. Learn these standard entries thoroughly.

A. Recording Annual Depreciation

• Debit: Depreciation Expense Account (Income Statement)
• Credit: Provision for Depreciation / Accumulated Depreciation Account (Statement of Financial Position)

Exam trap: Never credit the Non-Current Asset Account directly unless explicitly instructed or when using the revaluation method for small tools. Non-current assets remain recorded at original cost in their own ledger account.

B. Disposal of a Non-Current Asset

When an asset is sold, scrapped, or traded in, complete these steps in sequence:

1. Remove original cost:
   • Debit: Asset Disposal Account
   • Credit: Non-Current Asset Account (at original cost)
2. Remove accumulated depreciation up to the date of disposal:
   • Debit: Provision for Depreciation Account (total depreciation charged on this asset)
   • Credit: Asset Disposal Account
3. Record proceeds of sale:
   • For cash/bank sales:
     • Debit: Bank / Cash Account
     • Credit: Asset Disposal Account
   • For part-exchange allowance:
     • Debit: New Asset Account
     • Credit: Asset Disposal Account
4. Determine profit or loss on disposal:
   • If the Disposal Account has a debit balance, it represents a loss on disposal (Debit Income Statement, Credit Disposal Account).
   • If the Disposal Account has a credit balance, it represents a profit on disposal (Debit Disposal Account, Credit Income Statement).

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6. Comprehensive Worked Example

Let us apply these rules to an original scenario.

Scenario

Delta Freight Ltd closes its books on 31 December each year.

• On 1 January 2023, the business bought a delivery van (Van A) for $30,000 cash.
• Depreciation policy for vehicles: 20% per annum using the reducing balance method.
• Policy on timing: Proportionate depreciation based on complete months of ownership.
• On 1 July 2024, Delta Freight bought a second van (Van B) for $40,000 via bank transfer.
• On 30 September 2024, Van A was sold for $17,500 by bank transfer.

Let us prepare the entries for 2023 and 2024.

Step 1: Year Ended 31 December 2023

Depreciation on Van A:
$$\text{Cost} = $30,000$$
$$\text{Depreciation for 2023} = $30,000 \times 20% = $6,000$$

Carrying amount at 31 December 2023:
$$$30,000 - $6,000 = $24,000$$

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Step 2: Year Ended 31 December 2024

Depreciation on Van A up to disposal (1 January 2024 to 30 September 2024 = 9 months):
$$\text{Opening Carrying Amount} = $24,000$$
$$\text{Depreciation for 9 months} = $24,000 \times 20% \times \frac{9}{12} = $3,600$$

Total accumulated depreciation on Van A at date of disposal:
$$$6,000 \text{ (2023)} + $3,600 \text{ (2024)} = $9,600$$

Profit or Loss on Disposal of Van A:

• Original Cost: $30,000
• Accumulated Depreciation: $9,600
• Carrying Amount at Sale: $$30,000 - $9,600 = $20,400$
• Sale Proceeds: $17,500
• Loss on Disposal: $$20,400 - $17,500 = $2,900$

Depreciation on Van B (1 July 2024 to 31 December 2024 = 6 months):
$$\text{Cost} = $40,000$$
$$\text{Depreciation for 6 months} = $40,000 \times 20% \times \frac{6}{12} = $4,000$$

Total Depreciation Expense in Income Statement for 2024:
$$$3,600 \text{ (Van A)} + $4,000 \text{ (Van B)} = $7,600$$

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Step 3: Ledger Accounts (T-Accounts for 2024)

Motor Vehicles Account

Date	Details	Amount ($)	Date	Details	Amount ($)
1 Jan 2024	Balance b/d	30,000	30 Sep 2024	Disposal Account	30,000
1 Jul 2024	Bank (Van B)	40,000	31 Dec 2024	Balance c/d	40,000
Total		70,000	Total		70,000
1 Jan 2025	Balance b/d	40,000

Provision for Depreciation on Motor Vehicles Account

Date	Details	Amount ($)	Date	Details	Amount ($)
30 Sep 2024	Disposal Account	9,600	1 Jan 2024	Balance b/d	6,000
31 Dec 2024	Balance c/d	4,000	31 Dec 2024	Income Statement	7,600
Total		13,600	Total		13,600
			1 Jan 2025	Balance b/d	4,000

Disposal of Motor Vehicles Account

Date	Details	Amount ($)	Date	Details	Amount ($)
30 Sep 2024	Motor Vehicles	30,000	30 Sep 2024	Provision for Depn	9,600
			30 Sep 2024	Bank (Proceeds)	17,500
			31 Dec 2024	Income Statement (Loss)	2,900
Total		30,000	Total		30,000

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7. The Exam Checklist for Depreciation Questions

Before submitting your answer in your /a-level-accounting examination, run through this mental checklist:

• Check the method: Did the question specify straight-line, reducing balance, or revaluation?
• Look for residual value: Did you subtract residual value for straight-line? Did you leave it alone for reducing balance?
• Identify the timing rule: Does the business charge a full year's depreciation in the year of acquisition, or do you need to calculate pro-rata months?
• Update depreciation to disposal date: If using pro-rata depreciation, did you calculate the depreciation for the fraction of the year the asset was owned before calculating profit/loss on disposal?
• Keep accounts separate: Did you credit Provision for Depreciation instead of reducing the Asset at Cost account?
• Label your balances: Are Balance c/d and Balance b/d correctly placed, dated, and brought down to the next period?
• Financial statement presentation: In the Statement of Financial Position, did you present three columns (Cost, Accumulated Depreciation, Net Book Value)?

If you are preparing for an upcoming retake or working through past exam sets, explore our structured guides on /a-level-accounting-retake and /a-level-accounting-past-papers. For direct guidance on technical mechanics, book a session with a cambridge a level accounting tutor or browse our wide range of accounting, economics, and business tools under /resources.