Depreciation of Non-Current Assets - TCE Accounting (Tasmania)
“Calculate and record depreciation using the straight-line and reducing-balance methods.”
Depreciation spreads the cost of a non-current asset over the years it is used, matching the cost to the revenue it helps earn. The straight-line method charges an equal amount each year; the reducing-balance method charges a fixed percentage on the falling carrying value, giving higher expense early on.
What this dot point is asking
A non-current asset such as a vehicle or machine is used over many years, so charging its whole cost as an expense when bought would distort profit. Depreciation, a balance day adjustment, allocates that cost across the asset's useful life so each period bears a fair share.
Key terms
- Cost: the purchase price plus any costs to get the asset ready for use.
- Residual (salvage) value: the estimated amount the asset will be worth at the end of its useful life.
- Useful life: how long the business expects to use the asset.
- Carrying value (book value): cost less accumulated depreciation to date.
A contra-asset account that builds up the total depreciation charged on an asset since purchase. It is subtracted from the asset's cost on the balance sheet to show carrying value; the asset account itself stays at original cost.
Straight-line method
Straight-line charges the same expense every year.
Reducing-balance method
Reducing-balance applies a fixed percentage to the carrying value, so the expense is largest in year one and falls each year. Residual value is not subtracted first.
Whichever method is used, the entry is debit Depreciation expense and credit Accumulated depreciation. Only the amount differs. The asset account is never credited directly for ordinary depreciation.
Worked example
This example applies both the straight-line and reducing-balance methods to the same asset and records the journal entry, showing how the two methods produce different annual charges from the same starting figures.
Machine cost , residual value , useful life 4 years. Reducing-balance rate 30 percent.
Step 1: Apply the straight-line method
Straight-line deducts the residual value from cost to find the depreciable amount, then divides by the useful life to get a uniform annual charge. The same dollar amount is expensed every year, and the carrying value falls by the same increment each period.
Depreciation per year each year.
After year 1, accumulated depreciation and carrying value .
Step 2: Apply the reducing-balance method
Reducing-balance applies the rate directly to the carrying value at the start of each year. The residual value is not subtracted first. Because the carrying value falls each year, the depreciation charge also falls, giving a higher expense in the early years when the asset is most productive.
- Year 1: ; carrying value .
- Year 2: ; carrying value .
- Year 3: ; carrying value .
Step 3: Record the journal entry
The journal entry form is identical whichever method is used. Only the dollar amount changes. The asset account is never credited directly; instead the credit goes to Accumulated depreciation so the original cost remains visible.
Year 1, straight-line:
- Debit Depreciation expense
- Credit Accumulated depreciation
Final answer: Straight-line gives $4,500 per year; reducing-balance gives $6,000, $4,200, $2,940 for years 1 to 3.
Depreciation and the matching principle
Depreciation is a balance day adjustment that applies the matching principle. A non-current asset helps earn revenue over several years, so charging its whole cost in the year of purchase would overstate that year's expenses and understate every later year's. Spreading the depreciable amount (cost less residual value) across the useful life matches the cost of using the asset against the revenue it helps generate. Because useful life and residual value are estimates, depreciation involves judgement, which is why consistency from year to year is important for comparable results.
. Carrying value is also called book value or written-down value. It is never the asset's market value or resale price; depreciation allocates cost, it does not revalue the asset.
Choosing a method
Both methods spread the same total cost over the asset's life; they differ only in timing. Straight-line gives an equal charge each year and suits assets used evenly, such as buildings and fittings. Reducing-balance gives a high charge early that falls over time, which suits assets that are most productive or lose value fastest when new, such as vehicles and computers. The choice should reflect the pattern in which the asset's benefits are consumed, and once chosen it is applied consistently so results stay comparable across years.
Presentation in the balance sheet
A common TASC presentation sets the asset out in three figures: cost, less accumulated depreciation, equals carrying value. For the machine in the worked example after two years of straight-line depreciation, this reads cost , less accumulated depreciation , carrying value . Showing all three keeps both the historical cost and the amount consumed visible to the reader, which supports the reliability of the report.
Why this matters
Depreciation directly affects reported profit and the carrying value of assets, so it influences both the income statement and the balance sheet. Examiners expect the correct formula, the right treatment of residual value (used in straight-line, ignored in reducing-balance), and the standard journal entry. The choice of method also matters: reducing-balance suits assets that are most productive when new.
Ordinary depreciation is credited to Accumulated depreciation, a separate contra account, so the asset stays recorded at cost. Crediting the asset directly loses the original cost figure and makes the carrying value hard to verify. Also remember not to deduct residual value under the reducing-balance method.
Exam-style questions
Questions in the style of TASC exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice8 marksA business buys machinery on 1 July for 6\,000 and a useful life of 5 years. Calculate the depreciation expense for Years 1 and 2 and the carrying value at the end of Year 2 under (a) the straight-line method and (b) the reducing-balance method at 25 per cent. Show your working.Show worked answer →
Do both methods for two years, then the closing carrying values.
(a) Straight-line. Annual charge each year. Year 1 , Year 2 . Accumulated depreciation , so carrying value .
(b) Reducing-balance at 25 per cent (applied to carrying value, ignore residual). Year 1 ; carrying value . Year 2 ; carrying value .
Markers reward the straight-line formula using residual value, the reducing-balance percentage applied to the falling carrying value (not cost, and ignoring residual), accurate arithmetic for both years, and the two closing carrying values.
Practice4 marksExplain why depreciation is recorded by crediting an Accumulated Depreciation account rather than crediting the asset account directly, and state how each appears in the financial statements.Show worked answer →
A full 4 mark answer explains the contra-asset and the presentation.
Depreciation is credited to Accumulated Depreciation, a separate contra-asset account, so the asset account itself stays at original cost. This preserves two pieces of information for the reader: the historical cost of the asset and the total written off to date. If the asset were credited directly, the original cost would be lost and the carrying value would be hard to verify.
In the financial statements, Depreciation Expense for the year appears in the income statement, reducing profit. On the balance sheet the asset is shown at cost, less accumulated depreciation, equals carrying value. Markers reward the contra-asset point (cost preserved), and correctly placing the expense in the income statement and the accumulated balance as a deduction on the balance sheet.