The Idiot-Proof Guide to Depreciation &
Disposals
🎯 THE TL;DR (Too Long; Didn't Read)
Depreciation has nothing to do with finding the "true value" of an asset. It is
simply a way to spread the massive cost of an asset (like a delivery van) over
the years you actually use it, so you don't destroy your profit in Year 1!
🧠 THE GOLDEN RULE(S)
The Golden Rule of Depreciation Dates: You must ALWAYS read the company's
depreciation policy carefully. Are you told to charge a "full year's
depreciation in the year of purchase"? If not, you MUST "pro-rata"
(time-apportion) the charge based on the exact number of months the asset was
owned that year.
🛠️ THE 5-STEP BLUEPRINT TO DEPRECIATION & DISPOSALS
Step 1: Choose Your Weapon (The Calculation) First, look at the exam question to
see which method the business uses.
Method How it works The Formula
Straight-Line Charges the exact (Original Cost – Residual/Scrap Value) ÷
same amount every Useful Life
single year.
Reducing Charges more in early years, Net Book Value × Fixed Percentage (%)
Balance and less in later years.
- Micro-example: Buy a $12k car. Lasts 5 years. Scrap value
2k. Straight-line depreciation = (12k - 2k) / 5 = **2,000 per year**.
Step 2: Check the Clock (Time Apportionment) Did you buy the asset exactly on
day one of the financial year? If you bought it mid-year, you must shrink the
depreciation charge.
- Action: Multiply your annual depreciation by (Months Owned ÷ 12).
Step 3: Post the Double Entry Journal Once you have your dollar amount, record
it in the books. The entry is ALWAYS the same, no matter what method you used.
- DEBIT: Depreciation Expense (This lowers your profit on the SOPL).
- CREDIT: Accumulated Depreciation (This reduces the asset's value on the
SOFP).
Disposals
🎯 THE TL;DR (Too Long; Didn't Read)
Depreciation has nothing to do with finding the "true value" of an asset. It is
simply a way to spread the massive cost of an asset (like a delivery van) over
the years you actually use it, so you don't destroy your profit in Year 1!
🧠 THE GOLDEN RULE(S)
The Golden Rule of Depreciation Dates: You must ALWAYS read the company's
depreciation policy carefully. Are you told to charge a "full year's
depreciation in the year of purchase"? If not, you MUST "pro-rata"
(time-apportion) the charge based on the exact number of months the asset was
owned that year.
🛠️ THE 5-STEP BLUEPRINT TO DEPRECIATION & DISPOSALS
Step 1: Choose Your Weapon (The Calculation) First, look at the exam question to
see which method the business uses.
Method How it works The Formula
Straight-Line Charges the exact (Original Cost – Residual/Scrap Value) ÷
same amount every Useful Life
single year.
Reducing Charges more in early years, Net Book Value × Fixed Percentage (%)
Balance and less in later years.
- Micro-example: Buy a $12k car. Lasts 5 years. Scrap value
2k. Straight-line depreciation = (12k - 2k) / 5 = **2,000 per year**.
Step 2: Check the Clock (Time Apportionment) Did you buy the asset exactly on
day one of the financial year? If you bought it mid-year, you must shrink the
depreciation charge.
- Action: Multiply your annual depreciation by (Months Owned ÷ 12).
Step 3: Post the Double Entry Journal Once you have your dollar amount, record
it in the books. The entry is ALWAYS the same, no matter what method you used.
- DEBIT: Depreciation Expense (This lowers your profit on the SOPL).
- CREDIT: Accumulated Depreciation (This reduces the asset's value on the
SOFP).
