Changing asset values — common mistakes

In exam questions, always create a T-account for disposals. It is the safest way to ensure all components are included and to correctly calculate the profit or loss. Remember to remove the total depreciation for the asset being sold, not just one year's worth.

This would violate the matching principle. The machine will help generate revenue for many years (its useful life). Depreciation systematically spreads the cost of the machine over these years, matching the expense of using the asset against the revenue it helps to earn in each period. Expensing it all at once would drastically understate profit in the year of purchase and overstate it in subsequent years.

No, this is a common misconception. The cash received is the 'disposal proceeds'. The 'profit on disposal' is a calculated figure: Disposal Proceeds minus the Net Book Value (NBV) of the asset. For example, if you sell an asset with an NBV of £5,000 for £6,000 cash, you receive £6,000 in cash, but your profit on disposal is only £1,000. This profit is reported in the income statement.

No. The increase is an 'unrealised' gain because the asset has not been sold. It is credited to the Revaluation Surplus, which is a capital reserve within equity, not to the income statement. Therefore, it does not increase distributable profits and cannot be paid out as dividends. It simply reflects the asset's current fair value on the statement of financial position.