Depreciation

Depreciation

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

• Depreciation is the systematic allocation of the cost of a tangible non-current (fixed) asset, less its residual value, over its useful economic life, in line with the matching (accruals) concept.
• It is a cost allocation, not a valuation exercise and not a cash reserve for replacement.
• Straight-line formula: Depreciation per year = (Cost − Residual value) ÷ Useful life (in years).
• Reducing balance formula: Depreciation = Net Book Value (NBV) at start of year × Rate%.
• WASSCE accepts only Straight-line and Reducing/Diminishing balance as the two allowable methods.
• In the Income Statement (Profit or Loss) show depreciation as an expense; in the Statement of Financial Position deduct Accumulated Depreciation from the asset’s cost to arrive at NBV.

---

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Purpose and Underlying Concept

Depreciation recognises that a fixed asset (e.g. motor vehicle, machinery, furniture) is consumed over several accounting periods as it helps the business earn revenue. The accruals/matching concept requires that the cost be matched against the revenue it generates across the periods of use, rather than expensing the whole cost in the year of purchase.

Key Variables

• Cost — purchase price plus directly attributable costs (transport, installation, non-refundable duties).
• Residual (scrap) value — estimated proceeds expected on disposal at the end of the asset’s useful life.
• Useful economic life — the period (years) the asset is expected to be used by the entity.
• Depreciable amount = Cost − Residual value (this is what is spread over the life).
• Accumulated depreciation — total depreciation charged from acquisition to date.
• Net Book Value (NBV) = Cost − Accumulated depreciation.

The Two Acceptable Methods

Feature	Straight-Line	Reducing (Diminishing) Balance
Charge pattern	Equal each year	Higher in early years, falls later
Applied to	Cost less residual	NBV at start of each year
Rate used	100% ÷ useful life	(1 − (R/C)^(1/n)) × 100
Residual value	Explicitly deducted first	Built into the rate formula
Typical use	Buildings, fixtures	Vehicles, plant, ICT equipment

Accounting Entries

Each year: Debit Profit or Loss (Depreciation expense); Credit Provision for (Accumulated) Depreciation — a separate provision account is kept per asset class.

Final Accounts Presentation

• Income Statement / Profit or Loss: show depreciation as an expense within cost of sales or administrative expenses.
• Statement of Financial Position: show the asset at cost, less accumulated depreciation, to disclose NBV.

---

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Method Selection and Consistency

IAS 16 (Property, Plant and Equipment) and WASSCE marking guides require that the chosen method reflect the pattern of economic benefits expected from the asset. The method is applied consistently across periods. A change in method is treated prospectively — the new method applies from the current year onward; prior years are not restated.

Straight-Line Mechanics

Annual charge = (Cost − Residual value) ÷ Useful life in years. Straight-line rate (%) = (100% ÷ n) × 100. The depreciation charge is identical every year, so accumulated depreciation grows in a straight line while NBV declines in a straight line.

Reducing Balance Mechanics

Year 1 charge = Cost × r%; Year 2 charge = (Cost − Year 1 depreciation) × r%; and so on. The asset never reaches zero NBV under this method unless a residual of zero was factored into the rate; the asset is depreciated down to its estimated residual value.

Disposal of an Asset

On sale or scrapping:

1. Open a Disposal account.
2. Debit Disposal with cost; Credit Disposal with accumulated depreciation to date of sale to clear the two ledger accounts.
3. Credit Disposal with proceeds received.
4. Balance on Disposal = profit (credit balance) or loss (debit balance) transferred to Profit or Loss.

Common Mistakes WASSCE Examiners Exploit

• Crediting the asset (cost) account directly instead of the Provision for Depreciation account.
• Treating depreciation as a reserve or cash fund — it is neither.
• Applying the straight-line rate to NBV rather than to cost less residual.
• Depreciating land — land has unlimited useful life and is not depreciated unless it carries a depleting resource.
• Confusing depreciation (tangibles), amortisation (intangibles) and depletion (natural resources/WASSCE-Natural Resources).

Worked Micro-Example

A machine costs GH₵ 24,000, residual GH₵ 4,000, useful life 5 years.

• Straight-line charge per year = (24,000 − 4,000) ÷ 5 = GH₵ 4,000.
• NBV at end of Year 3 = 24,000 − (3 × 4,000) = GH₵ 12,000.

Practice Prompts

1. A delivery van costing GH₵ 80,000 has a residual of GH₵ 10,000 and a 5-year life. Compute the annual straight-line depreciation and the NBV at the end of Year 4.
2. Using a 25% reducing-balance rate, prepare the Depreciation and Provision accounts for three years for equipment costing GH₵ 50,000 with an estimated residual of GH₵ 6,250.

Content adapted based on your selected roadmap duration. Switch tiers using the selector above.