4.2 Accounting for Depreciation and Disposal of Non-Current Assets

2026 Syllabus Objectives

By the end of these notes, you should be able to:

  1. Define depreciation
  2. Explain the reasons for accounting for depreciation
  3. Name and describe the straight-line, reducing balance, and revaluation methods of depreciation
  4. Prepare ledger accounts and journal entries for the provision of depreciation
  5. Prepare ledger accounts and journal entries to record the sale of non-current assets, including the use of disposal accounts

1. What Is Depreciation?

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Depreciation is the way a business measures and records the fall in value of a non-current asset (a long-term item owned by a business, such as machinery, vehicles, or equipment) over time.

Think of it like this: if a business buys a delivery van today, that van will be worth less in five years. Depreciation is the method used to account for that gradual loss in value, spreading the cost of the asset across the years it is used.

Why Does an Asset Lose Value?

A non-current asset can decrease in value for several reasons:

  • Wear and tear — the asset gets physically worn down through regular use
  • Obsolescence — the asset becomes outdated because better technology has replaced it (for example, an old computer)
  • Using up — some assets, like a quarry or a natural resource, simply get used up or depleted over time
  • Passage of time — simply getting older reduces the useful life remaining

2. Reasons for Accounting for Depreciation

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Businesses must record depreciation because of two key accounting principles (rules that guide how financial records are kept):

The Matching Principle

This principle states that expenses must be matched to the income they helped to generate, in the same time period.

Imagine a business buys machinery for USD 30,000, expecting to use it for 10 years. It would be unfair and misleading to record the entire USD 30,000 as an expense in the first year, because the machinery will help the business earn income for 10 years. Depreciation solves this by spreading that cost across all 10 years so that each year carries a fair share of the expense.

The Prudence Principle

This principle states that a business should never overstate the value of its assets — it should always be cautious and realistic.

If a business bought machinery for USD 30,000 and still reported it at USD 30,000 five years later without any depreciation, the statement of financial position (the financial document that lists everything a business owns and owes) would show an inflated, unrealistic value. Depreciation ensures assets are shown at a more realistic, lower value.

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