QCE Accounting - Unit 3 - Managing resources for a sole trader business

Depreciation and accumulated depreciation

Learn straight-line and diminishing balance depreciation, accumulated depreciation, part-year calculations, historical cost and reporting for QCE Accounting.

Part of the free QCE Accounting notes library for Unit 3: Managing resources for a sole trader business.

Updated 2026-05-18 - 4 min read

Depreciation allocates the cost of a non-current asset over the periods that benefit from using it. It is not a valuation method that tries to show exact market value. It is an expense recognition process that applies accrual accounting by matching the cost of an asset with the revenue it helps generate.

Non-current assets such as vehicles, equipment, shelving and computers usually provide benefits for more than one reporting period. Recording the whole cost as an expense in the year of purchase would overstate expenses in that year and understate expenses later. Depreciation spreads the cost systematically.

Historical cost and accumulated depreciation

The historical cost principle records an asset at its original purchase cost, including costs needed to bring it into use. Instead of reducing the asset account directly, many accounting systems keep the asset at cost and use Accumulated Depreciation as a negative asset account.

| Account | Classification | Normal balance | Purpose | |---|---|---|---| | Equipment | Non-current asset | Debit | Records the historical cost of equipment | | Accumulated Depreciation - Equipment | Negative asset | Credit | Records total depreciation charged so far | | Depreciation Expense | Expense | Debit | Records depreciation for the current period |

The carrying amount is:

$ \text{Carrying amount}=\text{Historical cost}-\text{Accumulated depreciation} $

The carrying amount is also called written-down value or book value in many school examples.

Straight-line depreciation

Straight-line depreciation charges the same amount each year over the asset's useful life.

$ \text{Annual depreciation}=\frac{\text{Cost}-\text{Residual value}}{\text{Useful life}} $

This method is suitable when the asset gives benefits evenly over time, such as shelving or office furniture. It is simple, predictable and easy to budget. Its limitation is that many assets lose usefulness faster when they are new.

Diminishing balance depreciation

Diminishing balance depreciation charges a fixed percentage of the carrying amount each year.

$ \text{Depreciation}=\text{Carrying amount at start of period}\times\text{depreciation rate} $

This method produces higher depreciation in early years and lower depreciation later. It suits assets such as vehicles or technology that often lose value or productive efficiency faster at the beginning of their useful life. It also better reflects higher repair costs in later years because depreciation falls as maintenance may rise.

Part-year and periodic depreciation

If an asset is purchased during the year, depreciation should usually be calculated only for the period it was available for use, unless the task gives a different rule. For example, six months of straight-line depreciation is half the annual amount.

| Situation | Adjustment | |---|---| | Asset owned for 12 months | Record full annual depreciation | | Asset owned for 6 months | Record half annual depreciation | | Quarterly depreciation | Divide annual depreciation by 4 if using straight-line | | Monthly depreciation | Divide annual depreciation by 12 |

For diminishing balance, the percentage applies to the carrying amount at the relevant point. In school questions, read carefully whether depreciation is recorded annually, monthly or at disposal date.

Journal entry

The standard depreciation entry is:

| Debit | Credit | |---|---| | Depreciation Expense | Accumulated Depreciation - Asset |

This increases expenses and increases the negative asset account. It does not credit Cash at Bank because no cash is paid when depreciation is recorded.

Worked example

Quick check

Sources

• QCAA Accounting subject page
• QCAA Accounting 2025 syllabus
• ATO depreciation and capital expenses guidance
• AASB Conceptual Framework

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