I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 EXAM FOCUS POINT 

Examination questions often describe straight line depreciation in this way.

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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In practice, many businesses take a simplified approach where an asset has been purchased part-way 

through an accounting period. Instead of calculating the depreciation from the date the asset is 

acquired, the business instead charges a full year's depreciation in the year it is purchased and then no 

depreciation in the year it is disposed of.  

4.10 The reducing balance method 

The reducing balance method of depreciation calculates the annual depreciation charge as a fixed 

percentage of the carrying amount of the asset, as at the end of the previous accounting period. 

For example, a business purchases a non-current asset at a cost of $10,000. Its estimated residual 

value is $2,160. The business wishes to use the reducing balance method to depreciate the asset, and 

calculates that the rate of depreciation should be 40% of the reducing (carrying) amount of the asset. 

(The method of deciding that 40% is a suitable annual percentage is a problem of mathematics, not 

financial accounting, and is not described here.) 

 

 

 

Under the reducing balance method, unlike the straight line method, we do not deduct the residual 

value from the cost before depreciating. Instead, we depreciate the asset using the percentage given, 

until we reach the residual value, and then we stop depreciating, as illustrated in the table below.  

 

Accumulated depreciation 

 

 $    

 $      

 

Asset at cost 

 10,000 

 

 

Depreciation in year 1 (40%) 

  4,000 

 4,000 

 

Carrying amount at end of year 1 

 6,000 

 

 

Depreciation in year 2  

 

 

 

  (40% of reducing balance) 

 2,400 

 6,400 

 (4,000 + 2,400)

Carrying amount at end of year 2 

 3,600 

 

 

Depreciation in year 3 (40%) 

 1,440 

 7,840 

 (6,400 + 1,440)

Carrying amount at end of year 3 

 2,160 =  residual value 

 

 

 

 

 

 

 

You should note that with the reducing balance method, the annual charge for depreciation is higher in 

the earlier years of the asset's life, and lower in the later years. In the example above, the annual 

charges for years 1, 2 and 3 are $4,000, $2,400 and $1,440 respectively.