These notes explain how to calculate depreciation using the two examinable methods and how to judge which method best matches the way a non-current asset is used.

Straight-line method

Straight-line depreciation is often used when an asset is expected to provide benefits evenly over its useful life.

The annual charge is found by taking the depreciable amount, which is cost less residual value, and spreading it evenly over the estimated life of the asset.

Under this method:

• the same amount of depreciation is charged each full year, if estimates do not change

• accumulated depreciation increases by equal amounts

• the asset's net book value falls steadily until it reaches residual value

This graph shows straight-line depreciation as a constant, linear fall in book (net book) value over time. The straight line indicates the asset loses the same amount of value each year, reaching the salvage/residual value at the end of its useful life. Source

This method is easy to apply and makes comparisons between accounting periods more straightforward. It is usually suitable where the asset is used at a fairly even rate throughout its life. If the pattern of benefit is stable, a constant annual charge gives a fair representation of asset usage.

Reducing balance method

Reducing balance depreciation applies a fixed rate each year to the asset's net book value at the beginning of the year.

Because the net book value becomes lower after each year's depreciation, the annual expense also becomes lower from year to year.

This schedule table shows a declining-balance pattern where depreciation expense is highest in the first year and then decreases as the book value falls. It visually connects the idea that each year’s charge is calculated using a percentage applied to the opening book value, so the base becomes smaller over time. Source

Under this method:

• the highest depreciation charge is made in the early years

• later years have a smaller charge

• the asset's net book value falls more quickly at first and then more slowly

This method is often appropriate for assets that lose value quickly after purchase or generate greater benefit in earlier years. It may also suit assets where repairs and maintenance tend to rise as the asset gets older, because the falling depreciation charge can offset increasing operating costs.

Comparing the two methods

Pattern of depreciation charge

The main difference is the pattern of depreciation over time.

• Straight-line gives a constant annual amount.

• Reducing balance gives a decreasing annual amount.

This difference affects reported profit. For the same asset, the reducing balance method usually results in a larger expense in early years and a smaller expense in later years. Straight-line produces a more even effect on profit from year to year.

Effect on net book value

The method chosen also affects the value shown for the asset in the statement of financial position.

• With straight-line, net book value decreases by equal amounts each year.

• With reducing balance, net book value decreases rapidly at first, then more gradually.

In examination questions, it is important to update the net book value correctly after each year's depreciation. A reducing balance calculation must always be based on the opening net book value, not the original cost, unless the question states otherwise.

Selecting the most appropriate method

The most appropriate method is the one that best reflects how the asset's economic benefits are consumed. The decision should be based on the nature of the asset and the way it is expected to be used.

Straight-line is usually more suitable when:

• the asset is expected to be used evenly over time

• its efficiency stays relatively stable

• the benefit received each year is broadly similar

Examples may include some items of office furniture, fittings, or assets used consistently over many years.

Reducing balance is usually more suitable when:

• the asset is most efficient when new

• it loses value quickly in the early years

• the benefit received from the asset is higher at the start of its life

Examples may include vehicles, computers, and some machinery that become outdated or less efficient fairly quickly.

The choice of method should not be made simply to produce a preferred profit figure. In accounting, the method should reflect the expected pattern of use of the asset.

Common calculation points

Straight-line steps

• identify the cost

• deduct the residual value

• divide by the useful life

• charge the same annual amount for each full year

Reducing balance steps

• start with the opening net book value

• apply the fixed depreciation rate

• deduct the depreciation charge

• carry the closing net book value forward to the next year

Common errors include:

• using original cost instead of net book value for reducing balance

• ignoring a stated residual value in straight-line calculations

• confusing a fixed amount with a fixed rate

• failing to base each new year's reducing balance calculation on the updated carrying amount

Clear presentation matters. Candidates should show each year's depreciation charge separately and distinguish carefully between cost, accumulated depreciation, and net book value.