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What does ” A full year of depreciation is charged in the year of purchase and none in the year of disposal” mean?
Let’s use an example to illustrate:
If an asset is bought on the 1st October 2017 and the company’s year end is the 31st December 2017, then with this policy the asset will be depreciated by a full year, even though it is only 3 months old. So if the asset value was $10,000 and it has a predicted useful life of 10 years, its carrying value at 31st December will be $9,000. Without this policy, the depreciation would be apportioned across the year and its value would be $9,750.
For the disposal, let’s now say it’s 1st July 2022 and the company wants to sell the asset. The asset has been depreciated for 4 full years and so has a carrying value of $6,000. The company sells the asset for $8,000 and calculates the profit on disposal as $2,000. Without this policy, the depreciation would be apportioned across the year and the value would have been $5,500. This changes the profit on disposal and the depreciation charge for the year.
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