Depreciation is one of the most familiar topics in VCE Accounting, and it is precisely that familiarity that causes problems in the exam. Examiner’s Reports from 2019 through to 2023 consistently show that students who are confident with depreciation calculations still lose marks because they misunderstand what depreciation is meant to represent and how it should be applied in context.
The exam does not reward students for knowing how to calculate depreciation in isolation. It rewards students who understand why depreciation is recorded, when it is recorded, and how it affects financial reports over time.
Treating depreciation as a calculation instead of an allocation
A recurring issue noted in Examiner’s Reports is students treating depreciation as a mechanical expense calculation rather than an allocation of cost over an asset’s useful life. This misunderstanding becomes visible when students are asked to explain depreciation or justify a depreciation method.
In the 2022 and 2023 examinations, students were asked to explain the effect of depreciation on financial statements. Many responses stated that depreciation “reduces profit” without explaining that it allocates the cost of a non-current asset to the periods in which economic benefits are consumed. Responses that focused only on profit were capped because they ignored the asset side of the transaction.
High-scoring responses consistently explained that depreciation reduces the carrying value of the asset and recognises an expense, ensuring that expenses are matched to revenue over time.
Confusion between depreciation and asset valuation
Another persistent error is students treating depreciation as a valuation technique rather than a cost allocation process. Examiner’s Reports note that some students imply that depreciation reflects market value or resale value.
This error appeared explicitly in the 2021 and 2023 reports, where students justified depreciation methods by referring to changes in market price. These responses were capped because depreciation is not concerned with what the asset could be sold for, but with systematic allocation of historical cost.
Students who understand this distinction avoid a common trap in justification questions.
Incorrect application of depreciation methods
Straight-line and reducing-balance depreciation methods are both examined regularly, and Examiner’s Reports highlight predictable errors in their application.
In several exams, students correctly identified the required method but then applied the wrong base. For example, students sometimes applied reducing-balance depreciation to cost rather than to carrying value, or failed to adjust for residual value when using straight-line depreciation.
These errors suggest that students memorise formulas without understanding their structure. High-performing students consistently demonstrated awareness of what figure depreciation is applied to and why.
Balance day versus during-the-year depreciation
Depreciation questions also reveal confusion about timing. Examiner’s Reports note that students often fail to adjust depreciation for part-year ownership or treat depreciation as if it were recorded continuously rather than at balance day.
In the 2020 and 2022 examinations, marks were lost because students depreciated assets for a full year despite purchase dates being provided. The VCAA expects students to apply depreciation proportionally where required and to recognise that depreciation is a balance day adjustment.
Students who ignore timing information are penalised even when their depreciation rate is correct.
Depreciation and the Cash Flow Statement
Depreciation is also frequently mishandled in Cash Flow Statement and reconciliation questions. Examiner’s Reports repeatedly note that students treat depreciation as a cash outflow.
In reconciliation questions, depreciation must be added back to net profit because it is a non-cash expense. Students who subtract it demonstrate confusion between accrual accounting and cash accounting and lose marks accordingly.
High-scoring responses explicitly identify depreciation as non-cash and explain why it affects profit but not cash.
Written explanations and justification of depreciation methods
Justification questions involving depreciation are particularly discriminating. Students are often asked to justify the choice of depreciation method.
Examiner’s Reports show that weaker responses argue outcomes, such as higher or lower profit, rather than appropriateness. Strong responses justify the method by linking it to the pattern of economic benefits consumed by the asset and to faithful representation.
For example, reducing-balance depreciation may be justified where an asset provides greater benefits earlier in its life. Responses that articulate this reasoning consistently achieve full marks.
Why depreciation continues to appear in the exam
Depreciation remains a core exam topic because it integrates calculation, reporting, explanation, and judgement. It exposes whether students understand the purpose of accounting adjustments rather than just their mechanics.
The Examiner’s Reports show that depreciation errors are rarely due to difficulty. They are due to shallow understanding.
How ATAR STAR approaches depreciation
At ATAR STAR, depreciation is taught as a conceptual process first and a calculation second. Students learn to identify what the asset is, how it provides economic benefits, and how those benefits should be reflected across reporting periods.
This approach helps students who already “know depreciation” convert that familiarity into consistent exam performance, and it helps less confident students build a coherent understanding rather than relying on memory.