Calculate and record depreciation using the straight-line and reducing-balance methods.

Why depreciation is needed, how to calculate it under the straight-line and reducing-balance methods, and how accumulated depreciation gives carrying value.

Generated by Claude Opus 4.77 min answerUpdated 2026-05-30

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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.

Straight-line method

Straight-line charges the same expense every year.

Depreciation\ per\ year = \frac{Cost - Residual\ value}{Useful\ life}

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.

Depreciation = Carrying\ value \times rate\,\%

Worked example

Comparing the two methods

Asset details

Machine cost $20\,000$ , residual value $2\,000$ , useful life 4 years. Reducing-balance rate 30 percent.

Straight-line

Depreciation per year $= \frac{20\,000 - 2\,000}{4} = \$ 4,500$ each year.
After year 1, accumulated depreciation $= 4\,500$ and carrying value $= 20\,000 - 4\,500 = \$ 15,500$.

Reducing-balance

Year 1: $20\,000 \times 0.30 = \$ 6,000 $; carrying value$ = \ $14\,000$ .
Year 2: $14\,000 \times 0.30 = \$ 4,200 $; carrying value$ = \ $9\,800$ .
Year 3: $9\,800 \times 0.30 = \$ 2,940 $; carrying value$ = \ $6\,860$ .

Entry (year 1, straight-line)

Debit Depreciation expense $4\,500$
Credit Accumulated depreciation $4\,500$

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.