Reducing balance method

What it means

A depreciation method that applies a constant rate to the carrying amount of a non-current asset, giving a larger charge in early years and smaller charges later.

Example

An asset carried at RM8,000 depreciated at 25% is charged RM2,000, leaving RM6,000 to depreciate next year.

Why it matters

It suits assets that lose most value early or need more repairs as they age, matching cost to use.

In practice

Reducing balance depreciation is recorded each year as an expense in the income statement. It builds up in the provision for depreciation account, which is deducted from cost in the statement of financial position to show net book value. The percentage is applied to the carrying amount left after earlier charges, not to cost. So the annual expense falls over time.

Take a machine costing RM10,000 depreciated at 20% reducing balance. Year one charges RM2,000, leaving RM8,000. Year two charges RM1,600 on that RM8,000, leaving RM6,400. Year three charges RM1,280, and so on, never quite reaching zero.

This contrasts with the straight-line method, where the yearly charge is the same amount, based on cost less residual value. Reducing balance suits assets such as vehicles and machinery that lose most value early and often cost more to repair later. The falling depreciation and rising repairs together keep the total cost of using the asset fairly even across its life.

If reducing-balance figures keep coming out wrong, one of our teachers can work through your past-paper answers with you line by line. Book a trial class.

Related terms

• Depreciation
• Provision for depreciation
• Carrying amount

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.2 Depreciation and disposal of non-current assets (page 14).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.