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Depreciation in the financial statements
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At the year end, depreciation is calculated and shown in both the income statement and the statement of financial position.
Where it goes
Income statement: this year's depreciation charge is an expense.
Statement of financial position: non-current assets are shown at cost less accumulated depreciation (including this year's charge) = carrying amount.
Statement of financial position: non-current assets are shown at cost less accumulated depreciation (including this year's charge) = carrying amount.
Following the policy
Questions tell you the business's depreciation policy, for example: 'straight line at 20% of cost per year' or '25% reducing balance', and whether a full year's charge is made in the year of purchase.
Always read the policy carefully. Reducing balance is calculated on the carrying amount at the start of the year.
Always read the policy carefully. Reducing balance is calculated on the carrying amount at the start of the year.
Disposals at the year end
When an asset is sold during the year, remove its cost and accumulated depreciation, and include the profit on disposal as other income or the loss as an expense in the income statement.
Equipment at cost £40 000, accumulated depreciation at the start of the year £10 000. Policy: 20% reducing balance. Find this year's charge and the closing carrying amount.
- Carrying amount at start = 40 000 − 10 000 = £30 000
- Charge = 20% × 30 000 = £6000
- Closing carrying amount = 30 000 − 6000
Answer: £6000 charge; carrying amount £24 000
This year's depreciation is an expense in the income statement. Non-current assets are shown at cost less accumulated depreciation. Follow the stated policy. Reducing balance uses the carrying amount at the start of the year.
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