Depreciation

What it means

The systematic allocation of the depreciable amount of a non-current asset over its useful life.

Example

A van costing RM40,000 depreciated at 25% reducing balance is charged RM10,000 in year one.

Why it matters

Depreciation is an expense in the income statement and reduces the asset's carrying amount in the statement of financial position.

In practice

Depreciation appears twice in the accounts. The year's depreciation charge is an expense in the income statement. The running total, accumulated depreciation, is deducted from the asset's cost in the statement of financial position to give net book value.

Suppose equipment costs RM20,000 with an expected life of five years and no residual value. Using the straight-line method, the annual charge is RM4,000. After two years accumulated depreciation is RM8,000 and net book value is RM12,000. Depreciation is a non-cash expense. It applies the matching concept by spreading the cost against the revenue the asset helps earn.

Students often confuse the annual charge with accumulated depreciation. The charge is one year's cost. Accumulated depreciation is every year's charges added together. Depreciation is also not the asset's market value falling. It is an accounting estimate, so net book value rarely equals what the asset would fetch if sold.

If reducing-balance figures keep coming out wrong, one of our teachers can work through your past-paper answers with you line by line. Book a trial class.

Related terms

• Non-current asset
• Carrying amount
• Expense
• Capital expenditure
• Consistency concept
• Disposal of a non-current asset
• Provision for depreciation
• Reducing balance method
• Residual value
• Straight-line method
• Tangible asset

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

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.