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Why is the cost of a non-current asset spread over its useful life, and how do the straight-line and reducing-balance methods work?

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

A focused answer to the O-Level Principles of Accounts outcome on depreciation. Why assets are depreciated, the straight-line and reducing-balance methods, the double entry, and the carrying amount in the statements.

Generated by Claude Opus 4.89 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to calculate depreciation by the straight-line and reducing-balance methods, record it with double entry, and show the asset's carrying amount in the statements. The central insight is that depreciation is the matching principle applied to a non-current asset: the asset earns income over several years, so its cost is spread as an expense over those years rather than charged all at once.

The answer

Why depreciate

A non-current asset (machinery, vehicles, equipment) is used over many years, losing value through wear, age or obsolescence. Depreciation spreads its cost over its useful life, so each year bears a fair share of the cost against the income the asset helped earn. Depreciation is a non-cash expense: no money leaves the business when it is charged.

The straight-line method

The straight-line method charges the same amount each year:

\text{Annual depreciation} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life (years)}}

Residual value is the estimated amount the asset will be worth at the end of its life. This method suits assets that give even benefit each year, such as fixtures.

The reducing-balance method

The reducing-balance method charges a fixed percentage of the carrying amount (cost less depreciation so far) each year, so the charge is larger early and smaller later:

\text{Depreciation} = \text{Rate} \times \text{Carrying amount at the start of the year}

This suits assets that are most productive when new, such as vehicles and machinery.

Recording depreciation

The double entry each year:

Debit Depreciation (an expense, charged to the income statement).
Credit Accumulated depreciation (a contra-asset that builds up over time).

The asset account itself stays at cost. In the statement of financial position the asset is shown at its carrying amount (net book value):

\text{Carrying amount} = \text{Cost} - \text{Accumulated depreciation}

Worked example

A van cost $\$ 25,000 $, has a useful life of 4 years and a residual value of$ \ $5\,000$ . (a) Find the straight-line charge. (b) Find the first two years' charges under reducing balance at $25\%$ . (c) Show the carrying amount at the end of year 2 under each method.

Step 1: Straight-line annual charge

\text{Annual depreciation} = \frac{25\,000 - 5\,000}{4} = \frac{20\,000}{4} = \$5\,000 \text{ per year}

Step 2: Reducing-balance, years 1 and 2 at 25%

Year 1: $25\% \times 25\,000 = \$ 6,250 $; carrying amount$ = 25,000 - 6,250 = \ $18\,750$ . Year 2: $25\% \times 18\,750 = \$ 4,687.50 $; carrying amount$ = 18,750 - 4,687.50 = \ $14\,062.50$ .

Step 3: Carrying amount at end of year 2, straight-line

Accumulated depreciation $= 5\,000 \times 2 = \$ 10,000 $; carrying amount$ = 25,000 - 10,000 = \ $15\,000$ .

Step 4: Compare

Method	Year 1	Year 2	Carrying amount end of year 2
Straight-line	5,000	5,000	15,000
Reducing-balance	6,250	4,688	14,063

Reducing balance charges more early; straight-line charges evenly. Each year's charge is debited to Depreciation and credited to Accumulated depreciation.

Examples in context

Example 1. Matching a machine to its output. A factory buys a $\$ 40,000 $machine expected to last 8 years. Charging$ \ $5\,000$ of straight-line depreciation each year sets a fair slice of the machine's cost against the goods it helps make annually. Without depreciation, year 1 would carry the whole $\$ 40,000$ and later years none, distorting profit.

Example 2. A van that loses value fastest when new. A delivery van loses most value in its first year or two. The reducing-balance method matches this by charging more depreciation early ( $25\%$ of a high carrying amount) and less later, so the expense pattern reflects the way the van actually loses value.

Try this

Q1. A machine costs $\$ 12,000 $, has a 5-year life and a$ \ $2,000$ residual value. State the straight-line annual depreciation. [2 marks]

Cue. $\dfrac{12\,000 - 2\,000}{5} = \dfrac{10\,000}{5} = \$ 2,000$ per year.

Q2. State the double entry for charging a year's depreciation. [2 marks]

Cue. Debit Depreciation (expense); Credit Accumulated depreciation.

Q3. An asset cost $\$ 10,000 $with$ \ $3,500$ accumulated depreciation. State its carrying amount and where it is shown. [2 marks]

Cue. Carrying amount $= 10\,000 - 3\,500 = \$ 6,500$, shown among non-current assets in the statement of financial position.

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.

Original7 marksA machine cost

\

20\,000

. It has an estimated useful life of 5 years and a residual value of

2\,000

. (a) Calculate the annual depreciation using the straight-line method. (b) Using the reducing-balance method at

20\%

per year, calculate the depreciation for years 1 and 2. (c) State the double entry to record a year's depreciation.

Show worked answer →

(a) Straight-line: annual depreciation $= \dfrac{\text{cost} - \text{residual value}}{\text{useful life}} = \dfrac{20\,000 - 2\,000}{5} = \dfrac{18\,000}{5} = \$ 3,600$ per year.

(b) Reducing-balance at $20\%$ :

Year 1: $20\% \times 20\,000 = \$ 4,000 $. Carrying amount$ = 20,000 - 4,000 = \ $16\,000$ .
Year 2: $20\% \times 16\,000 = \$ 3,200 $. Carrying amount$ = 16,000 - 3,200 = \ $12\,800$ .

(c) Double entry: Debit Depreciation (expense, to the income statement); Credit Accumulated depreciation (a contra-asset).

Markers reward the $\$ 3,600 $straight-line charge, the$ \ $4\,000$ and $\$ 3,200$ reducing-balance charges, and the correct double entry crediting accumulated depreciation.

Original5 marksExplain why a business charges depreciation on its non-current assets, and state how the asset appears in the statement of financial position after depreciation.

Show worked answer →

A business charges depreciation to spread the cost of a non-current asset over the years in which it is used, matching the cost to the income it helps earn (the matching principle). Assets wear out, become outdated or are used up, so charging depreciation recognises this loss in value as an expense over the asset's useful life rather than all at once.

In the statement of financial position the asset is shown at its carrying amount (also called net book value): cost less accumulated depreciation to date. So a $\$ 20,000 $asset with$ \ $7\,200$ accumulated depreciation is shown at $\$ 12,800$.

Markers reward the matching reason (spreading cost over useful life as the asset is used), and stating that the asset appears at carrying amount (cost less accumulated depreciation).