Account for straight-line depreciation
Explain depreciation's role and calculate straight-line expense, accumulated depreciation and carrying amount across the two financial statements.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 10.1.4. Ratio calculations use the formulae listed in the relevant Cambridge syllabus. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Read the figures, dates and assumptions supplied in the question before calculating or interpreting an accounting result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What amount is spread over an asset's useful life under straight-line depreciation?
What you will learn
- Explain why depreciation allocates an asset's depreciable amount across its useful life
- Calculate annual straight-line depreciation and carrying amount
- Trace the effect on profit or loss and the statement of financial position
Depreciation allocates cost over useful life
Straight-line depreciation spreads an asset's depreciable amount evenly across its estimated useful life. Annual charge = (cost−estimated residual value) ÷ useful life. It is an accounting allocation, not a direct measure of an asset's market value or a cash payment in that year.
After n full years, accumulated depreciation is normally annual charge × n, up to the depreciable amount; carrying amount = cost−accumulated depreciation. Follow the dates, residual value and policy in the question.
The charge affects both statements
Depreciation is an expense in the statement of profit or loss and lowers profit, other things equal. Accumulated depreciation reduces the non-current asset's carrying amount in the statement of financial position.
The straight-line method is the method specified here. Do not substitute reducing-balance or units-of-production calculations. If an asset is acquired or disposed of partway through a year, use a time apportionment only when the question asks for it or supplies a convention.
Pause and explain
Cost is $24,000, residual value $4,000 and useful life 4 years. What is annual straight-line depreciation?
Worked example
Equipment costs $50,000, has an estimated residual value of $5,000 and a useful life of five years. Find annual depreciation and carrying amount after two full years.
Show the worked solution
- Depreciable amount = 50,000−5,000=$45,000.
- Annual charge = 45,000÷5=$9,000.
- After two years, accumulated depreciation=$18,000; carrying amount=50,000−18,000.
Answer Annual straight-line depreciation is $9,000. After two full years, accumulated depreciation is $18,000 and carrying amount is $32,000.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A machine costs $36,000, residual value $6,000, useful life 5 years. Calculate the annual charge and carrying amount after 3 years.
Give me a hint
Find depreciable amount first, then annual and accumulated charges.
Compare my reasoning
- Depreciable amount=36,000−6,000.
- Annual depreciation=30,000÷5.
- Three-year carrying amount=36,000−3×annual charge.
Annual depreciation is $6,000; after three years the carrying amount is $18,000.
Look for these in your work
- Residual value is deducted first
- Annual charge is correct
- Accumulated charge is applied to original cost
An asset has annual depreciation of $8,000. Explain the effect of recording the charge on operating profit and its carrying amount, ignoring tax.
Give me a hint
Follow the expense in one statement and accumulated depreciation in the other.
Compare my reasoning
- Operating expenses increase by $8,000.
- Profit from operations falls by $8,000.
- The carrying amount falls by $8,000 for the year.
Operating profit falls by $8,000, other things equal. Accumulated depreciation increases by $8,000 and the asset's carrying amount falls by the same amount. The charge itself is not a $8,000 cash outflow that year.
Look for these in your work
- Profit effect is correct
- Asset effect is correct
- Cash misconception is avoided
Two businesses own identical machines but one has a different depreciation estimate. Why might their reported profits and asset values differ without the machines having different market prices?
Give me a hint
Separate accounting estimates from the asset's physical market value.
Compare my reasoning
- Useful life or residual-value estimates can differ.
- These assumptions change the annual allocation and accumulated depreciation.
- Published carrying amounts are accounting measures, not automatic market valuations.
Different useful-life or residual-value assumptions can produce different depreciation charges and carrying amounts. This changes reported profit and asset values even if market conditions and the machines' market prices are the same; comparison needs the accounting policies and estimates.
Look for these in your work
- Estimates are identified
- Effects on both accounts are connected
- Market value is distinguished
Common mistakes
- Depreciating the residual value as well as the depreciable amount
- Treating depreciation as a cash payment
- Calling carrying amount the current market price
What can you explain now?
What amount is spread over an asset's useful life under straight-line depreciation?
Compare with the explanation
Cost less estimated residual value
This is the depreciable amount allocated over the useful life.
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Make it stick
How do cost, residual value and useful life produce depreciation and carrying amount, and which statements change?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.