Explain depreciation and its accounting purpose
Relate depreciation to the use and ageing of non-current assets without treating it as a cash fund or market valuation.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.3 only. Practice is self-checked, not an official Cambridge grade; the separately published 2029 syllabus, timed papers and human subject-teacher review remain outstanding.
Before you begin
- Topics 1.1 and 1.2 introduce business resources, equity, double entry and period profit. Use those ideas when recording non-current assets.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A vehicle loses usefulness because newer technology makes it obsolete. Is physical wear the only possible cause of depreciation?
What you will learn
- Identify causes of depreciation
- Explain why depreciation is charged
- Connect depreciation with matching and carrying amount
Assets lose service potential over time
A non-current asset can lose value through use, physical wear, passage of time, obsolescence or depletion. Different causes may matter for different assets; a machine used heavily may wear faster, while technology may become outdated even if physically sound.
Depreciation allocates the depreciable amount of an asset over the periods expected to benefit from its use. It supports matching the asset's cost with the income it helps generate and produces a carrying amount for the statement of financial position.
Depreciation is not cash or market value
Recording depreciation is an accounting charge, not a transfer of cash into a separate fund. It does not by itself determine the asset's market price or sale proceeds.
The method should reflect how the asset's service potential is consumed, where this can be estimated. Review the estimate if circumstances change and apply the relevant accounting requirements.
Pause and explain
Why is depreciation charged over the periods an asset is used?
Worked example
A machine cost $30,000 and will be used for six years. Explain why the business records depreciation even if it will not pay cash each year for the charge.
Show the worked solution
- The machine supports operations over several periods.
- Depreciation allocates its depreciable cost across those periods.
- It records the use of the asset and reduces its carrying amount; it does not create a cash reserve.
Answer Depreciation allocates the machine's cost to the periods benefiting from its use and reduces its carrying amount. It is an accounting expense, not cash saved in a fund.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
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's carrying amount falls by $4,000 this year through depreciation. How much cash has depreciation itself used?
Give me a hint
Separate the non-cash accounting charge from actual payments.
Compare my reasoning
- Depreciation debits an expense and credits accumulated depreciation.
- No cash or bank account is part of that entry.
- Cash changes only when a separate payment or receipt occurs.
Depreciation itself uses $0 cash. The $4,000 is an expense that reduces profit and the asset's carrying amount.
Look for these in your work
- Expense entry understood
- No cash entry assumed
- Statement effects separated
A manager says, 'The van is depreciated by $5,000, so it must sell for $5,000 less.' Assess the claim.
Give me a hint
Compare accounting allocation with market price.
Compare my reasoning
- Depreciation allocates cost using the selected method and estimates.
- Sale price depends on market demand, condition, age and other factors.
- The carrying amount and sale proceeds can differ; any disposal gain or loss is calculated at sale.
The claim is not justified. Depreciation is an allocation of cost, not a prediction of market price. Sale proceeds may be higher or lower than the carrying amount.
Look for these in your work
- Depreciation defined
- Market factors identified
- Disposal comparison stated
A business buys a machine near year-end and expects to use it for five years. Explain why recording its entire price as this year's expense may misstate performance.
Give me a hint
Consider the time periods that benefit from the asset.
Compare my reasoning
- The machine provides service beyond the current period.
- Charging the full cost now places several years of benefit in one period's expense.
- Capitalise the asset under the applicable rules and allocate its depreciable amount over the useful life.
The full cost should not normally be charged to one period when the machine benefits several periods. Capitalise it under the applicable accounting rules and charge depreciation over its useful life.
Look for these in your work
- Multi-period benefit identified
- Matching issue explained
- Appropriate treatment stated
Common mistakes
- Calling depreciation a cash payment
- Claiming depreciation always equals the fall in market price
- Charging the whole asset cost as an expense when it is acquired for long-term use
What can you explain now?
Does a depreciation charge itself move cash into a separate bank account?
Compare with the explanation
No; it is an accounting expense
The journal entry records expense and accumulated depreciation, not a cash transfer.
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Make it stick
What does depreciation allocate, and what does it not create?
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.