How do we spread the cost of a long-lasting asset over the years it is used?
Calculate depreciation using the straight-line and reducing-balance methods and show it in the accounts
A simple answer to the N(A)-Level Principles of Accounts outcome on depreciation. Why depreciation is charged, the straight-line and reducing-balance methods, and how accumulated depreciation and net book value are shown.
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What this dot point is asking
SEAB wants you to calculate depreciation by the straight-line and reducing-balance methods and to show it in the accounts. Depreciation is the adjustment that spreads the cost of a long-lasting asset over its life. The central insight is that depreciation is not about value falling in the market; it is about charging each year with a fair share of the asset's cost for the benefit it gave that year, which is the matching principle applied to non-current assets.
The answer
Why we depreciate
A non-current asset such as a machine or van is used over several years. Charging its whole cost in the year of purchase would understate that year's profit and overstate later years'. Depreciation spreads the cost (less any residual value) across the years the asset is used, so each year bears a fair share.
The straight-line method
The same amount is charged each year:
It is simple and suits assets that give even benefit over time, such as fixtures.
The reducing-balance method
A fixed percentage is applied to the falling net book value each year:
The charge is larger early and smaller later, which suits assets that lose more usefulness in their early years, such as vehicles.
Showing it in the accounts
- The yearly charge is a depreciation expense in the income statement.
- The total charged so far is accumulated depreciation, deducted from the asset's cost to give its net book value in the statement of financial position.
Examples in context
Example 1. A delivery van. A courier buys a van that loses most usefulness in its first few years. Reducing-balance depreciation matches this by charging a large amount early and less later, so the expense tracks how the van is actually used. Straight-line would charge the same each year, which fits an asset like office shelving but not a fast-ageing vehicle.
Example 2. Reading the balance sheet. After three years, a \15,000\ accumulated depreciation shows a net book value of \6,000$. This is not what the machine would sell for; it is the cost not yet charged to profit. Understanding this stops a reader from treating net book value as a market price, a common misunderstanding.
Try this
Q1. State the straight-line depreciation on an asset costing \5,000$ with no residual value over 4 years. [2 marks]
- Cue. \dfrac{5\,000 - 0}{4} = \1,250$ per year.
Q2. An asset has cost \20,000\. State its net book value. [1 mark]
- Cue. 20\,000 - 7\,000 = \13,000$.
Q3. Explain why reducing-balance depreciation gives a larger charge in the early years. [2 marks]
- Cue. The fixed rate is applied to the net book value, which is highest at the start and falls each year, so the charge shrinks over time.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original6 marksA machine costs \10\,000\. (a) Calculate the annual depreciation using the straight-line method. (b) State the net book value at the end of year 2.Show worked answer →
(a) Straight-line depreciation = \dfrac{\text{cost} - \text{residual value}}{\text{useful life}} = \dfrac{10\,000 - 1\,000}{5} = \dfrac{9\,000}{5} = \1,800$ per year.
(b) After 2 years, accumulated depreciation = 2 \times 1\,800 = \3,600=-= 10,000 - 3,600 = \.
What markers reward: the correct straight-line formula and \1,800\ found by deducting two years of depreciation.
Original6 marksA van costs \8\,00025\%$ per year on the reducing-balance method. Calculate the depreciation for year 1 and year 2, and the net book value at the end of year 2.Show worked answer →
Year 1 depreciation = 25\% \times 8\,000 = \2,000= 8,000 - 2,000 = \.
Year 2 depreciation = 25\% \times 6\,000 = \1,500= 6,000 - 1,500 = \.
Under reducing balance, the percentage is applied to the falling net book value, so the charge is larger early on and smaller later.
What markers reward: \2,000\ in year 2 (on \6,000\), and the \4,500$ net book value, with the point that the charge reduces each year.
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