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Unit III · Adjusting the accounts
10 min readConcept sheetOften a 5- or 10-mark calculation

Depreciation of non-current assets

Depreciation spreads the cost of a non-current asset over its useful life. It is an expense, not a cash payment, and it reduces the asset's carrying amount.

Depreciable amountCost − residual value
Straight-line(Cost − residual value) ÷ useful life
Reducing balanceRate × carrying amount at the start of the year
EntryDr Depreciation expense, Cr Accumulated depreciation

What depreciation is

Assets such as vehicles, machines and furniture are used for several years, so their cost is spread over those years to match the income they help earn (the matching concept). Depreciation is this systematic allocation of the depreciable amount (cost minus residual value) over the useful life. It is not a way of valuing the asset and not a cash payment. Causes include wear and tear, the passage of time, obsolescence and depletion. Land is usually not depreciated. In Sri Lanka the standard on property, plant and equipment (LKAS 16) sets these rules.

Worked example 1: straight-line method

Problem

A delivery van was bought on 1 April 2023 for Rs. 6,000,000. Its residual value is Rs. 600,000 and its useful life 5 years. Find the annual depreciation and the carrying amount at 31 March 2026.

Working
  1. Depreciable amount: 6,000,000 − 600,000 = 5,400,000.
  2. Annual depreciation: 5,400,000 ÷ 5 = 1,080,000.
  3. Three years to 31 March 2026: accumulated depreciation 3 × 1,080,000 = 3,240,000.
  4. Carrying amount: 6,000,000 − 3,240,000 = 2,760,000.
Answer

Depreciation Rs. 1,080,000 a year; carrying amount at 31 March 2026 Rs. 2,760,000.

Worked example 2: reducing balance method

Problem

A machine costs Rs. 2,000,000 and is depreciated at 20% a year on the reducing balance. Show the first three years.

Working
  1. Year 1: 20% × 2,000,000 = 400,000; carrying amount 2,000,000 − 400,000 = 1,600,000.
  2. Year 2: 20% × 1,600,000 = 320,000; carrying amount 1,600,000 − 320,000 = 1,280,000.
  3. Year 3: 20% × 1,280,000 = 256,000; carrying amount 1,280,000 − 256,000 = 1,024,000.
  4. Check: 400,000 + 320,000 + 256,000 = 976,000; 2,000,000 − 976,000 = 1,024,000.
Answer

The charge falls each year: Rs. 400,000, Rs. 320,000, Rs. 256,000. Carrying amount after three years: Rs. 1,024,000.

Worked example 3: part of a year

Problem

Office equipment costing Rs. 1,200,000 was bought on 1 October 2025. The policy is 10% a year on cost (straight-line), charged on a time basis. The year ends on 31 March 2026.

Working
  1. Full-year charge: 10% × 1,200,000 = 120,000.
  2. Months used: October to March = 6.
  3. Charge for this year: 120,000 × 6/12 = 60,000.
Answer

Depreciation for the year ended 31 March 2026 = Rs. 60,000.

Worked example 4: disposal of an asset

Problem

Equipment that cost Rs. 800,000, with accumulated depreciation of Rs. 500,000, is sold for Rs. 350,000 by cheque. Find the gain or loss and show the entries.

Working
  1. Carrying amount: 800,000 − 500,000 = 300,000.
  2. Gain: 350,000 − 300,000 = 50,000.
  3. Dr Disposal 800,000; Cr Equipment 800,000 (remove the cost).
  4. Dr Accumulated depreciation 500,000; Cr Disposal 500,000.
  5. Dr Bank 350,000; Cr Disposal 350,000.
  6. Disposal account: credits 500,000 + 350,000 = 850,000 against a debit of 800,000, so Dr Disposal 50,000; Cr Gain on disposal 50,000.
Answer

Gain on disposal Rs. 50,000, shown as other income in the income statement.

Straight-line vs reducing balance

Straight-lineThe same charge every year. Simple. Suits assets used evenly over their lives, such as buildings and furniture.
Reducing balanceA higher charge in early years, falling later. Suits assets that lose value fast or need more repairs later, such as vehicles and computers.
In Sri Lankan business

A Sri Lankan transport company running a fleet of lorries depreciates every vehicle each year. Without depreciation, profit would look high in the years after the purchase and the cost of replacing the fleet would come as a shock.

Exam angle

Short answer: “Define depreciation.” The systematic allocation of the depreciable amount (cost less residual value) of a non-current asset over its useful life.

Structured question: “Calculate depreciation for three years by the straight-line and reducing balance methods.” Show each year's charge and carrying amount in a table for both methods, then compare the pattern of charges.

Essay: “Explain the causes of depreciation and the methods of providing for it. Show the entries for the disposal of an asset.” Define, list the causes, explain and compare the two methods with figures, then show the disposal account and the gain or loss.

Remember it

Straight-line: the same amount every year. Reducing balance: the same rate on a falling balance. Carrying amount = cost − accumulated depreciation.

Read alongside the books on your syllabus: Dyckman, Hanlon, Magee & Pfeiffer, Financial Accounting · Weygandt, Kimmel & Kieso, Accounting Principles. Written from standard textbooks; faculty review in progress. Spotted an error? Report it.