A Level Accounting: Accounting for Non-Current Assets — Revision Notes (Cambridge 9706)

Related: 1.3 study guide

Condensed, exam-focused notes for 1.3 Accounting for non-current assets, Cambridge AS & A Level Accounting (9706), 2026-2028 series.

Capital vs revenue expenditure/income

	Capital	Revenue
Expenditure	Acquiring/improving a non-current asset (benefits more than one period)	Day-to-day running costs (benefits current period only)
Income	Selling non-current assets, raising long-term finance	Normal trading activity (e.g. sales revenue)

• Misclassifying capital as revenue expenditure: understates profit and asset value.
• Misclassifying revenue as capital expenditure: overstates profit and asset value.

Why assets depreciate

• Causes: physical wear and tear, economic obsolescence, passing of time (fixed useful life), depletion (e.g. mineral reserves).
• Depreciation = systematically allocating an asset’s cost over its useful life, applying the matching/accruals concept — cost matched against the revenue it helps generate each period.

Two depreciation methods

• Straight-line: (cost − residual value) ÷ useful life — equal charge every year. Suits assets that lose value evenly (e.g. fixtures and fittings).
• Reducing balance: fixed % applied to carrying value (cost − accumulated depreciation) each year — higher charge early, falling over time. Suits assets losing most value early (e.g. vehicles, machinery).
• Choosing the most appropriate method for a given asset is itself examinable — a judgement, not just a calculation.

Cost model vs revaluation model

• Cost model: asset stays recorded at original cost less accumulated depreciation.
• Revaluation model: asset periodically revalued to current market value; gains generally go to a revaluation reserve, not straight to profit.
• Must be able to prepare ledger accounts/journal entries for both acquisition and revaluation.

Disposal

• Compare sale proceeds (or part-exchange allowance) with carrying value at disposal to find profit or loss on disposal.
• Close out cost and accumulated depreciation accounts through a disposal account.
• Depreciation charge for the year affects both the statement of profit or loss and the statement of financial position.

Exam technique for this topic

Practise the two depreciation methods side by side on the same asset and figures so the difference in pattern (level charge vs declining charge) becomes intuitive before moving to full disposal workings — these two skills are commonly tested together within a single structured question, so being fluent in one but hesitant in the other will cost time under exam pressure. Always check the depreciation policy explicitly stated in the question (full year in year of acquisition/disposal, pro-rata, or a different stated policy) rather than assuming a default, since applying the wrong policy cascades an error through every subsequent calculation in that question. Keep the capital/revenue expenditure distinction sharp from the outset, since a misclassification error here propagates directly into profit, asset value, and every later financial statement calculation built on top of it.

Worked comparison: straight-line vs reducing balance

Consider a delivery van bought for $20,000 with a residual value of $2,000 and a 4-year useful life, depreciated at 40% under the reducing balance method for comparison. Under straight-line, the annual charge is a constant ($20,000 − $2,000) ÷ 4 = $4,500 every year. Under reducing balance, the charge in year 1 is 40% × $20,000 = $8,000, then 40% of the new carrying value of $12,000 = $4,800 in year 2, and so on — a much higher charge early, falling steadily thereafter. Practising this side-by-side calculation on identical figures, and then explaining in words why a vehicle (which loses most of its market value in its first year or two) is usually better matched to reducing balance than to straight-line, builds exactly the judgement-plus-calculation skill this sub-topic examines together.

Worked example: disposal with part exchange

A machine with an original cost of $15,000 and accumulated depreciation of $9,000 (carrying value $6,000) is part-exchanged for a new machine, with the supplier allowing $4,500 against the new machine’s price. The loss on disposal is the carrying value minus the part-exchange allowance: $6,000 − $4,500 = $1,500 loss. In the ledger, this requires transferring the old asset’s cost and its accumulated depreciation into a disposal account, crediting the disposal account with the part-exchange allowance received (recorded as the cost of the new asset), and the resulting $1,500 balance is transferred to the statement of profit or loss as a loss on disposal. Working through this kind of combined disposal-with-part-exchange question, rather than only simple cash-sale disposals, prepares candidates for the more complex structured questions this topic typically includes.

Self-test

1. What is the formula for straight-line depreciation?
2. Does the reducing balance method apply its percentage to original cost or carrying value?
3. What effect does treating capital expenditure as revenue expenditure have on profit?
4. Under the revaluation model, where does a revaluation gain generally go?
5. What two account balances must be removed when a non-current asset is disposed of?

Answers: 1. (Cost − residual value) ÷ useful life. 2. Carrying value (cost minus accumulated depreciation), not original cost. 3. It understates profit, since the expenditure is wrongly deducted as an expense in the current period. 4. To a revaluation reserve, not straight to profit. 5. The asset’s cost and its accumulated depreciation.

A final note on evaluating decisions

The syllabus explicitly expects candidates to use this topic’s content to evaluate relevant information and make informed business decisions, not only to perform the calculations correctly. Practise extending a completed depreciation or disposal calculation into a short evaluative comment — for instance, whether a business’s choice of depreciation method still suits an asset whose actual pattern of use has changed since purchase — since structured questions on this topic increasingly end with this kind of applied, judgement-based final part.