Common mistakes in depreciation questions (and how to avoid them)

Depreciation is one of the most predictable topics in IGCSE Accounting, yet it costs students marks every session. The theory is short and the arithmetic is simple. Most errors come from a few habits that are easy to break once you know them.

Mixing up the two methods

The straight-line method charges the same amount every year: cost less residual value, spread over the asset’s life. The reducing balance method charges a fixed percentage of the carrying amount, so the charge is larger early on and falls each year.

The commonest mistake is applying the reducing-balance percentage to the original cost every year instead of the falling balance. Decide which method the question tests. Use cost for straight line and carrying amount for reducing balance.

Underline the method named in the question before you touch the calculator. A question that gives a life in years usually points to straight line, and a percentage per annum usually points to reducing balance. Write the method at the top of your working so you do not slip into the wrong routine halfway through a multi-year table.

A worked mini-illustration (hypothetical figures)

A business buys a delivery van for RM40,000 and depreciates it at 20% a year using reducing balance. These figures are invented to show the pattern. In year one the charge is 20% of RM40,000 = RM8,000, leaving a carrying amount of RM32,000.

In year two the charge is 20% of RM32,000 (not RM40,000) = RM6,400, leaving RM25,600. In year three it is 20% of RM25,600 = RM5,120. The charge falls each year and the carrying amount never reaches zero.

Compare straight line on the same van, with a five-year life and a RM4,000 residual value. Depreciate RM40,000 - RM4,000 = RM36,000 over five years, which is a flat RM7,200 each year. Writing both tables side by side is a fast way to feel the difference between the methods.

Forgetting the residual value under straight line

Under straight line, depreciate cost less residual value. A machine costing RM50,000 with a RM5,000 residual value over five years is depreciated on RM45,000, giving RM9,000 a year, not RM10,000.

Under reducing balance, the percentage is applied to the whole carrying amount without deducting residual value first. Some students then wrongly subtract residual value here too, and the whole table drifts off. If a reducing-balance question gives a residual value, it usually matters only at disposal.

Charging a full year on a disposal

When an asset is bought or sold partway through the year, follow the policy the question states. Many questions charge a full year in the year of purchase and none in the year of sale.

Others charge by the month. Students lose marks by inventing their own rule.

Confusing the asset account with the provision account

The asset stays in its own account at cost. Accumulated depreciation builds up in a separate provision for depreciation account. Carrying amount is cost less the provision balance.

A frequent error is reducing the asset account itself each year. Keep cost in the asset account and the total in the provision account, and the statement of financial position will show both correctly.

Getting the disposal calculation backwards

On disposal, compare the sale proceeds with the carrying amount, not the original cost. Open a disposal account. Debit it with the cost. Credit it with the accumulated depreciation and with the proceeds. A credit balance is a profit on disposal, and a debit balance is a loss.

Students often compare proceeds with cost and report a large false loss, or forget to remove the accumulated depreciation.

The step most often skipped is moving the accumulated depreciation of that specific asset out of the provision account. If a business owns several assets, only the depreciation on the asset sold moves to the disposal account. Leaving the full balance in place, or moving all of it, spoils both the profit or loss on disposal and the provision balance carried forward.

Treating depreciation as a movement of cash

Depreciation is an estimate of cost used up, not money set aside. It reduces profit and the asset’s carrying amount, but no cash leaves the business.

Do not describe it as “saving up to replace the asset”. Say it spreads the cost of the asset over its useful life. This links to the matching concept: the cost of using an asset is matched against the revenue it helps earn in the same period.

Presentation slips that cost method marks

Show the depreciation working clearly and label the provision for depreciation account. In the statement of financial position, present cost, less accumulated depreciation, equals carrying amount. Neat working earns method marks even when a final figure slips.

How to drill this until it is automatic

Work several short questions on each method back to back, then a mixed set so you must choose the method. Redo any you get wrong after a few days. The gap forces real recall.

If depreciation still catches your child out, one of our teachers can work through both methods and the disposal calculation with them. If reducing-balance figures keep coming out wrong, we can go through their past-paper answers line by line. Book a trial class to start.

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.2 Depreciation and disposal of non-current assets (page 14).