What you'll learn
- What fixed (tangible) assets are and how they are recorded at cost.
- How depreciation works and why a business charges it.
- How to calculate depreciation using the straight-line and reducing-balance methods.
- How to record the disposal (sale) of an asset and calculate the profit or loss.
- How to present fixed assets in the Tangible Assets Note of the financial statements.
Fixed assets and key terms
- Fixed (tangible) assets — long-term assets used to earn income, not bought for resale, for example land and buildings, vehicles, equipment and furniture.
- Cost price — everything spent to bring the asset into use and into location (purchase price plus delivery, installation, import duties and similar costs, but not repairs).
- Residual value (scrap value) — the estimated amount the asset will be worth at the end of its useful life.
- Useful life — the number of years the business expects to use the asset.
- Depreciation — the systematic write-off (allocation) of the cost of an asset over its useful life.
- Accumulated depreciation — the total depreciation charged on an asset since it was bought. It is a negative (contra) asset account.
- Carrying value (book value) = Cost − Accumulated depreciation.
Depreciation methods
Straight-line method
The same amount is written off each year.
Formula: Depreciation = (Cost − Residual value) ÷ Useful life, or simply Cost × rate.
Reducing-balance (diminishing balance) method
A fixed percentage is applied to the carrying value, so the amount written off shrinks each year.
Formula: Depreciation = Carrying value × rate.
If an asset is bought or sold during the year, depreciation is charged only for the months the business owned the asset (pro rata).
Worked example 1 — Straight-line depreciation and disposal
Facts (the financial year ends 28/29 February):
- Equipment bought on 1 March 2021 for R240 000,00.
- Depreciation: 15% per year on cost (straight-line).
- Sold on 31 August 2024 for R100 000,00 cash.
Step 1 — Annual and monthly depreciation.
- R240 000,00 × 15% = R36 000,00 per year.
- R36 000,00 ÷ 12 = R3 000,00 per month.
Step 2 — Depreciation up to the date of sale.
- 1 March 2021 to 28 February 2024 = 3 full years = 3 × R36 000,00 = R108 000,00.
- 1 March 2024 to 31 August 2024 = 6 months = 6 × R3 000,00 = R18 000,00.
- Total accumulated depreciation = R108 000,00 + R18 000,00 = R126 000,00.
Step 3 — Carrying value at the date of sale.
- R240 000,00 − R126 000,00 = R114 000,00.
Step 4 — Profit or loss on sale.
- Selling price R100 000,00 − carrying value R114 000,00 = a loss of R14 000,00.
Step 5 — General Journal entries.
| Details | Debit (R) | Credit (R) |
|---|---|---|
| Asset disposal | 240 000,00 | |
| Equipment | 240 000,00 | |
| Accumulated depreciation on equipment | 126 000,00 | |
| Asset disposal | 126 000,00 | |
| Bank | 100 000,00 | |
| Asset disposal | 100 000,00 | |
| Loss on sale of asset | 14 000,00 | |
| Asset disposal | 14 000,00 |
Step 6 — Asset disposal account.
| Asset disposal | Debit (R) | Credit (R) |
|---|---|---|
| Equipment (cost transferred) | 240 000,00 | |
| Accumulated depreciation (transferred) | 126 000,00 | |
| Bank (sale proceeds) | 100 000,00 | |
| Loss on sale of asset (balancing figure) | 14 000,00 | |
| Total | 240 000,00 | 240 000,00 |
The disposal account balances, which proves the entry was recorded correctly.
Worked example 2 — Reducing-balance depreciation with a part year
Facts: A vehicle is bought on 1 April 2022 for R150 000,00. Depreciation is 20% per year on carrying value. The financial year ends 28/29 February.
- Year 1 (1 April 2022 to 28 February 2023 = 11 months): R150 000,00 × 20% × 11/12 = R27 500,00. Carrying value = R122 500,00.
- Year 2 (1 March 2023 to 29 February 2024): R122 500,00 × 20% = R24 500,00. Carrying value = R98 000,00.
- Year 3 (1 March 2024 to 28 February 2025): R98 000,00 × 20% = R19 600,00. Carrying value = R78 400,00.
| Year ended | Carrying value at start (R) | Depreciation (R) | Carrying value at end (R) |
|---|---|---|---|
| 28 February 2023 | 150 000,00 | 27 500,00 | 122 500,00 |
| 29 February 2024 | 122 500,00 | 24 500,00 | 98 000,00 |
| 28 February 2025 | 98 000,00 | 19 600,00 | 78 400,00 |
Notice how the depreciation amount falls each year: that is the defining feature of the reducing-balance method.
Worked example 3 — Recording depreciation at year end
If a business owns equipment with a cost of R240 000,00 and the depreciation for the year is R36 000,00, the year-end adjustment is:
| Details | Debit (R) | Credit (R) |
|---|---|---|
| Depreciation | 36 000,00 | |
| Accumulated depreciation on equipment | 36 000,00 |
Depreciation is an expense (debit) and accumulated depreciation increases (credit). The asset account itself is never credited while the asset is still in use.
The Tangible Assets Note
This note appears in the financial statements and shows the movement in each class of fixed asset during the year.
| Note: Tangible assets (year ended 28 February 2025) | Vehicles (R) | Equipment (R) |
|---|---|---|
| Carrying value at beginning of year | 320 000,00 | 180 000,00 |
| Cost | 400 000,00 | 250 000,00 |
| Accumulated depreciation | (80 000,00) | (70 000,00) |
| Movements | ||
| Additions | 120 000,00 | 40 000,00 |
| Disposals at carrying value | (75 000,00) | — |
| Depreciation for the year | (88 000,00) | (36 000,00) |
| Carrying value at end of year | 277 000,00 | 184 000,00 |
| Cost | 445 000,00 | 290 000,00 |
| Accumulated depreciation | (168 000,00) | (106 000,00) |
Check the vehicles column: R320 000,00 + R120 000,00 − R75 000,00 − R88 000,00 = R277 000,00. The cost line also checks out: R400 000,00 + R120 000,00 − R75 000,00 = R445 000,00.
Common mistakes
- Charging depreciation on the carrying value when the straight-line method is required, or the other way around.
- Forgetting to charge depreciation for part of a year when an asset was bought or sold during the year.
- Crediting the asset account directly for depreciation instead of using the accumulated depreciation account.
- Using the carrying value instead of the accumulated depreciation when transferring amounts on disposal.
- Getting the profit or loss on disposal the wrong way round: it is selling price minus carrying value.
- Including repairs and maintenance in the cost price of an asset (only costs to bring it into use are capitalised).
- Forgetting that land is normally not depreciated, while buildings are.
Quick summary / cheat sheet
- Carrying value = Cost − Accumulated depreciation.
- Straight-line: Cost × rate (the same amount every year).
- Reducing balance: Carrying value × rate (the amount shrinks every year).
- Part year: multiply the yearly figure by months ÷ 12.
- Disposal: transfer the cost, transfer the accumulated depreciation, record the sale, then balance the disposal account to find the profit or loss.
- Profit = selling price greater than carrying value. Loss = selling price less than carrying value.
- Depreciation entry: Debit Depreciation, Credit Accumulated depreciation.
- The asset account is credited (removed) only when the asset is sold or scrapped.
Practice questions
- A machine costs R180 000,00 and is depreciated at 20% per year on cost. What is the depreciation for one year?
- Using the machine in question 1 (straight-line), what is the carrying value after 3 years?
- A vehicle with a carrying value of R90 000,00 is sold for R82 000,00. Is there a profit or a loss, and how much?
- An asset bought on 1 July for R120 000,00 is depreciated at 15% per year on cost. The year ends 28 February. Calculate the depreciation for the first year.
- A delivery van has a carrying value of R64 000,00. Depreciation is 25% per year on the reducing-balance method. What is the depreciation for the next year?
- Name the two accounts used when recording depreciation for a year.
- Why does a business charge depreciation at all?
Answers
- R180 000,00 × 20% = R36 000,00.
- R180 000,00 − (3 × R36 000,00) = R180 000,00 − R108 000,00 = R72 000,00.
- R82 000,00 − R90 000,00 = a loss of R8 000,00.
- 8 months (July to February): R120 000,00 × 15% × 8/12 = R12 000,00.
- R64 000,00 × 25% = R16 000,00.
- Depreciation (an expense) and Accumulated depreciation (a contra-asset).
- Because a fixed asset helps to earn income over several years, so its cost is spread (allocated) over its useful life to match the income it helps produce.
Official EduRank Team notes. Always cross-check with your textbook and teacher.