Explain the causes of depreciation and the methods of providing for it. Show the entries for the disposal of an asset.

1. 1 · Define depreciation. Allocation of cost less residual value over the useful life; applies the matching concept.
2. 2 · List the causes. Wear and tear, passage of time, obsolescence, depletion.
3. 3 · Straight-line method. Formula and a figure: (6,000,000 − 600,000) ÷ 5 = 1,080,000 a year.
4. 4 · Reducing balance method. Rate × opening carrying amount: 20% of 2,000,000 = 400,000, then 320,000.
5. 5 · Compare the methods. Equal charge vs falling charge; which assets suit each.
6. 6 · Disposal entries.
   • Transfer cost and accumulated depreciation to a disposal account.
   • Credit the sale proceeds.
   • The balance is the gain or loss, taken to the income statement.
7. 7 · Conclude. Depreciation is a non-cash expense that gives a truer profit and carrying amount.

Scoring tip: Set the two methods side by side in a three-year table; it shows the falling charge at a glance.