Property, Plant and Equipment — full notes
Paper No. 1: Financial Accounting · Accounting for Assets and Liabilities - PPE
Property, Plant and Equipment
1. What depreciation is - and is not
Depreciation spreads the cost of a non-current asset over the periods it is used in, matching cost against the income it helps generate. It is not an attempt to track market value, and it is not a cash outflow - the cash left the business when the asset was bought.
2. Straight-line method
Charges the same amount every year:
Annual depreciation = (Cost - Residual value) / Useful life
Example: a delivery van costs KES 1,200,000, residual value KES 200,000, 5-year useful life. (1,200,000 - 200,000) / 5 = KES 200,000 per year, every year.
3. Reducing balance method
Charges a fixed percentage of Net Book Value, not original cost, so the charge shrinks each year.
Annual depreciation = Net Book Value x rate%
Same van, reducing balance at 25%:
| Year | Opening NBV | Depreciation charge | Closing NBV |
|---|---|---|---|
| 1 | 1,200,000 | 300,000 | 900,000 |
| 2 | 900,000 | 225,000 | 675,000 |
| 3 | 675,000 | 168,750 | 506,250 |
Compare to straight-line: KES 200,000 every year, NBV falling steadily to 600,000 over the same period. Reducing balance front-loads the expense. Neither is "more correct" - it depends how the asset actually loses value.
4. Cost at acquisition
Cost is the purchase price plus every cost directly attributable to getting the asset to the location and condition needed for it to work as intended: delivery, installation, testing. Ongoing running costs are expenses, not part of the asset's cost.
5. Disposal - profit or loss
Compare sale proceeds to Net Book Value at the disposal date:
Proceeds > NBV -> Profit on disposal
Proceeds < NBV -> Loss on disposal
Example: equipment cost KES 400,000, accumulated depreciation at disposal KES 280,000, NBV = KES 120,000. Sold for KES 150,000: profit on disposal of KES 30,000. Sold for KES 90,000 instead: loss on disposal of KES 30,000.