Step-by-step guide
How to calculate depreciation (reducing balance method)
The reducing balance method charges a fixed percentage of the carrying amount each year, so the charge falls. It suits assets that lose value fastest when new.
Step by step
- Find the carrying amount. Start with the asset's cost. Subtract any accumulated depreciation from earlier years to get the current carrying amount.
- Apply the fixed rate. Multiply the carrying amount by the given percentage. This is this year's depreciation charge.
- Update accumulated depreciation. Add this year's charge to the accumulated depreciation total.
- Update the carrying amount. Subtract the charge from the carrying amount. This lower figure is the base for next year.
- Repeat each year. Repeat for each year of the asset's life. The charge gets smaller every year.
Worked example
A machine costs RM8,000 and is depreciated at 25% reducing balance. Year 1: 25% × 8,000 = RM2,000. Year 2: the carrying amount is 6,000, so 25% × 6,000 = RM1,500.
Understanding the method
Many assets, such as vans and machines, lose most of their value early and less as they age. Reducing balance matches this. The same percentage is applied each year, but to a smaller carrying amount, so the charge is largest in year one and shrinks after that.
The carrying amount (also called net book value) is cost less accumulated depreciation to date. It is always the base for the next year's calculation.
The rate stays constant, the base falls, so the charge falls. The charge never reaches exactly zero, because a percentage of a positive figure is always positive.
Here is an example. A machine costs RM20,000 and is depreciated at 25% a year on the reducing balance. Year 1: 25% of 20,000 = RM5,000, leaving RM15,000.
Year 2: 25% of 15,000 = RM3,750, leaving RM11,250. Year 3: 25% of 11,250 = RM2,812.50, leaving RM8,437.50.
With straight-line at 25%, the charge would be a flat RM5,000 every year and the machine would be written off in four years. Under reducing balance the carrying amount stays above zero for much longer.
To check your work, each year's charge must be smaller than the one before. Then add the charges: 5,000 + 3,750 + 2,812.50 = RM11,562.50.
Cost less this total is 20,000 − 11,562.50 = RM8,437.50, which matches the year-3 carrying amount. Keep two decimal places until the end, because rounding early causes errors.
Questions are worded in different ways. Some give the carrying amount at a date, so you apply the rate straight away. Some give accumulated depreciation, so you subtract it from cost first.
If an asset is bought part-way through the year, read whether the question wants a full year's charge or a charge for the months held. If there are several assets, work each on its own carrying amount.
Common mistakes: mixing up the year's charge with accumulated depreciation, and borrowing a straight-line rate for a reducing balance question. Another is forgetting that the income statement shows the charge while the statement of financial position shows cost less accumulated depreciation. The two methods use different rates.
If your 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 skills
The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.
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