Depreciation of Non-Current Asset
We will learn what depreciation is and how to calculate it using the straight-line method and the reducing-balance method. We will also learn the journal entries to record depreciation, how it is presented in the Statement of Financial Performance, and how accumulated depreciation is shown in the Statement of Financial Position.
Related Lessons:
What is Depreciation
Depreciation is the allocation of the original cost of a non-current asset over its useful life. It is the amount that the non-current asset loses each year.
Accumulated depreciation is the total amount a non-current asset loses to date. It is calculated by adding up the depreciation expense for each year from the time the asset is purchased until today.
Net book value is the value of a non-current asset after deducting accumulated depreciation from its cost.
Net book value = Cost − Accumulated depreciation
Straight-line Method of Depreciation
Depreciation calculated using the straight-line method remains constant over the asset’s useful life. There are two formulae used in the calculation of depreciation by the straight-line method.
Formula 1 of straight-line method:
(Cost – Scrap value) / Useful life
Formula 2 of straight-line method:
(Cost – Scrap value) x Rate of depreciation in %
Reducing-Balance Method of Depreciation
Depreciation calculated using the reducing-balance method reduces over the asset’s useful life. This is because the cost of the asset stays the same, but accumulated depreciation increases as the asset ages. As a result, the net book value decreases, and this lower value is used to calculate depreciation.
Formula of reducing-balance method:
(Cost – Accumulated depreciation) x Rate of depreciation in %
Recording Depreciation
Depreciation is an expense since the business loses value on its non-current asset. As such, depreciation is a Debit account.
Accumulated depreciation is a contra asset as it is deducted from the cost of the non-current asset. Therefore, it is a Credit account.
To record depreciation:
Dr Depreciation of asset
Cr Accumulated depreciation of asset
Closing of depreciation account at the end of the financial year:
Dr Income summary
Cr Depreciation of asset
The balances in the accumulated depreciation account are brought forward to the next accounting year.
In the financial statements:
Depreciation is recorded as an expense in the statement of financial performance.
Accumulated depreciation is recorded as a deduction against the cost of the non-current assets in the statement of financial position, to derive at the net book value of the non-current asset.