Depreciation (Edexcel IGCSE Accounting)

Adjustments for Provision for Depreciation

Spec point — IGCSE_ACCOUNTING:S5.178

How do I record depreciation on the financial statements?

• Calculate the depreciation charge for the year

• The depreciation charge for the year is shown on the income statement

• The depreciation charge for the year is added to the provision for depreciation to find the total depreciation to date

• The statement of financial position shows:

  • The cost of the non-current assets

  • The accumulated depreciation to date

    • Including the charge for the current year

  • The carrying value

    • The cost minus the depreciation

Which accounting concepts are used when recording depreciation?

• The following accounting concepts are used when recording depreciation:

Worked Example Carlita owns a restaurant in her local area. Carlita’s financial year end is 30 April.

On 1 May 2022, she bought furniture costing $15 000 and paid for it by cheque. Carlita’s policy for the depreciation of furniture is to use the reducing balance method of depreciation at 20% per annum. Carlita charges depreciation in the year of purchase.

(a) Prepare an extract from the income statement for the year ended 30 April 2023 and an extract of the non-current assets section from the statement of financial position at 30 April 2023.

(b) Prepare an extract from the income statement for the year ended 30 April 2024 and an extract of the non-current assets section from the statement of financial position at 30 April 2024.

Answer

Part (a)

• Calculate the depreciation charge for the first year by finding 20% of the carrying value

• In the first year, the carrying value and cost are the same

  • 20% ✕ $15 000 = $3 000

• Calculate the carrying value at the end of the first year

• Subtract the total depreciation from the cost

  • $15 000 - $3 000 = $12 000

• Prepare the extracts

  • Only include the year’s depreciation on the income statement
  • Include the cost, total depreciation and carrying value on the statement of financial position

Final answer: Carlita Final answer: Extract from the Income Statement for the year ended 30 April 2023
	Final answer: $
Final answer: Expenses
Final answer: Depreciation of furniture	Final answer: (3 000)

Final answer: Carlita Final answer: Extract from the Statement of Financial Position at 30 April 2023
	Final answer: $**	Final answer: **$	Final answer: $
Final answer: Non-current assets	Final answer: Cost	Final answer: Accumulated depreciation	Final answer: Carrying Final answer: value
Final answer: Furniture	Final answer: 15 000	Final answer: (3 000)	Final answer: 12 000

Part (b)

• Calculate the depreciation charge for the second year by finding 20% of the carrying value

  • 20% ✕ $12 000 = $2 400

• Find the total depreciation to date

  • $3 000 + $2 400 = $5 400

• Calculate the carrying value at the end of the second year

• Subtract the total depreciation from the cost

  • $15 000 - $5 400 = $9 600

• Prepare the extracts

  • Only include the year’s depreciation on the income statement
  • Include the cost, total depreciation and carrying value on the statement of financial position

Final answer: Carlita Final answer: Income Statement (extract) for the year ended 30 April 2024
	Final answer: $
Final answer: Expenses
Final answer: Depreciation of furniture	Final answer: (2 400)

Final answer: Carlita Final answer: Statement of Financial Position (extract) at 30 April 2024
	Final answer: $**	Final answer: **$	Final answer: $
Final answer: Non-current assets	Final answer: Cost	Final answer: Accumulated depreciation	Final answer: Carrying Final answer: value
Final answer: Furniture	Final answer: 15 000	Final answer: (5 400)	Final answer: 9 600