Depreciation & Adjustments

Adjustments make the accounts reflect the true position, following the matching (accruals) concept.

Depreciation

Spreading the cost of a non-current asset over its useful life.

Straight-line: $\dfrac{\text{cost} - \text{residual value}}{\text{useful life}}$ — equal amount each year.
Reducing balance: a fixed percentage of the remaining (carrying) value each year — more in early years.

Worked example. A machine costs £20,000, residual value £2,000, useful life 5 years. Straight-line depreciation $= \dfrac{20{,}000 - 2{,}000}{5} = £3{,}600$ per year.