Financial Accounting · Depreciation

Depreciation Methods: Straight-Line and Reducing Balance Explained

Updated 11 October 2026 · Fact-checked

Depreciation spreads an asset's depreciable amount over its useful life. Straight-line charges (cost − residual value) ÷ life every year. Reducing balance charges a fixed percentage of carrying amount. Units of production charges by usage. To solve a question, find the depreciable base, apply the method, then update carrying amount.

Understand Depreciation Methods: Straight-Line and Reducing Balance

A non-current asset such as a machine helps a business earn for several years. IAS 16 says you must not charge its whole cost in the year you buy it. Depreciation spreads the cost over the asset's useful life, so each year's profit bears a fair share. This is the matching idea.

Depreciation is an allocation of cost, not a measure of value. It is also not a cash cost. The cash left the business when you bought the asset. The yearly charge is an expense in profit or loss, and it reduces the carrying amount (cost less accumulated depreciation) in the statement of financial position.

The straight-line method gives the same charge every year. It suits assets that give about equal benefit each year, such as buildings or office furniture. The reducing balance method applies a fixed percentage to the carrying amount at the start of each year, so the charge is highest early on and falls over time. It suits assets that lose most benefit early, or that cost more to maintain as they age.

The units of production method links depreciation to usage, such as machine hours or units made. It suits assets whose wear depends on output. IAS 16 requires the method to reflect the pattern in which the asset's benefits are used, and to be reviewed at least at each year end. Residual value and useful life are estimates and are also reviewed.

Key formulas to remember

Depreciable amount: Cost − residual value; Used in straight-line and units of production. Reducing balance applies its rate to carrying amount, not to this figure.
Straight-line annual charge: (Cost − residual value) ÷ useful life in years; Same charge every full year. Adjust for part years if the question says so.
Reducing balance annual charge: Rate % × carrying amount at start of the year; Carrying amount = cost − accumulated depreciation. Residual value is not deducted first; the rate already allows for it.
Units of production charge: (Cost − residual value) ÷ total expected units × units used in the year; Total expected units might be hours, kilometres or output.
Carrying amount: Cost − accumulated depreciation; This is the figure shown in the statement of financial position.

How to solve Depreciation Methods: Straight-Line and Reducing Balance questions

Use the same short routine for every depreciation question. It stops you using the wrong base.

1Read which method is named and whether the question asks for the charge, accumulated depreciation or carrying amount, and for which year.
2Write down cost, residual value, useful life or rate, and any usage figures.
3For straight-line and units of production, calculate cost − residual value first.
4For reducing balance, apply the rate to opening carrying amount, year by year, with no residual value deducted.
5Check for a part year or a purchase date, and for any change in estimates.
6Calculate the required charge, then accumulated depreciation and carrying amount if asked.
7Sense-check: carrying amount must never fall below residual value, and the answer must match the year and unit asked.

Quickest way: Three-line shortcut for number entry questions

When to use it: Use it when a multiple choice or number entry question gives a single asset and asks for one year's charge or carrying amount.

Straight-line: (cost − residual) ÷ life. Multiply by the number of years for accumulated depreciation.
Reducing balance: multiply the carrying amount by (1 − rate) once for each year to get the closing carrying amount. Year 1 charge is cost × rate.
Units of production: work out the rate per unit, then multiply by the units used.
Subtract from cost for carrying amount, and enter the figure in the unit requested, without symbols or commas if the box needs this.

Common mistakes in Depreciation Methods: Straight-Line and Reducing Balance

Deducting residual value before applying the reducing balance percentage
Students copy the straight-line routine.
Fix: Apply the rate to the carrying amount only. Residual value is not part of the calculation.
Applying the reducing balance rate to original cost every year
Students forget the base falls each year.
Fix: Use opening carrying amount: cost less accumulated depreciation to date.
Forgetting that depreciation is cumulative when asked for carrying amount
Students stop after one year's charge.
Fix: Cost − all depreciation charged to the date. Re-read what the question asks for.
Ignoring part-year ownership
Students rush and take a full year's charge.
Fix: If the question gives a purchase date or time-apportions the first year, multiply the annual charge by months ÷ 12.
Treating depreciation as a way to show an asset's market value
The words carrying amount sound like value.
Fix: Remember depreciation allocates cost. Market value is a separate matter, covered by revaluation.

Worked examples

Example 1

A company buys a machine on the first day of the year for $60,000. Residual value is $6,000 and useful life is 6 years. Calculate the straight-line annual charge and the carrying amount at the end of Year 3.

Show the solution

Depreciable amount = 60,000 − 6,000 = 54,000.
Annual charge = 54,000 ÷ 6 = 9,000.
Accumulated depreciation after 3 years = 9,000 × 3 = 27,000.
Carrying amount = 60,000 − 27,000 = 33,000.

Answer: Annual charge $9,000; carrying amount at end of Year 3 $33,000.

Example 2

A delivery van costs $40,000 on the first day of the year. It is depreciated at 25% reducing balance. Calculate the charge for Year 2 and the carrying amount at the end of Year 2. A second machine costing $90,000 with residual value $9,000 is expected to make 300,000 units; it makes 40,000 units in the year. Calculate its units of production charge.

Show the solution

Van, Year 1 charge = 25% × 40,000 = 10,000.
Carrying amount at end of Year 1 = 40,000 − 10,000 = 30,000.
Year 2 charge = 25% × 30,000 = 7,500.
Carrying amount at end of Year 2 = 30,000 − 7,500 = 22,500.
Machine depreciable amount = 90,000 − 9,000 = 81,000.
Rate per unit = 81,000 ÷ 300,000 = $0.27.
Charge = 0.27 × 40,000 = 10,800.

Answer: Van: Year 2 charge $7,500; carrying amount at end of Year 2 $22,500. Machine charge for the year: $10,800.

Exam tips

Look at the verb: charge for the year, accumulated depreciation and carrying amount are three different answers.
In reducing balance questions, write the carrying amount each year in a small list. It stops base errors.
In multiple response questions, check each statement against the rule: reducing balance gives higher early charges, straight-line gives equal charges.
Check whether a part year, disposal or change in estimate is mentioned before calculating.
Section B questions often put depreciation inside a non-current asset schedule. Keep cost, accumulated depreciation and carrying amount in separate columns.

Practice questions from Depreciation

Depreciation Methods: Straight-Line and Reducing Balance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Depreciation Methods: Straight-Line and Reducing Balance: frequently asked questions

What is the difference between straight-line and reducing balance depreciation?

Straight-line charges the same amount each full year, based on cost less residual value. Reducing balance charges a fixed percentage of the carrying amount, so charges fall over time. Choose the method that best matches how the asset's benefits are used.

How do I calculate reducing balance depreciation in ACCA?

Multiply the opening carrying amount by the rate. Subtract the charge to get the new carrying amount. Repeat for each year. Do not deduct residual value first.

When is the units of production method suitable?

It suits assets whose wear depends on use, such as a machine measured in hours or output. The charge rises and falls with activity. You need a reliable estimate of total expected units.

Can a business change its depreciation method?

Yes, if the new method better reflects the pattern of benefits. Under IAS 16 the method is reviewed at least at each year end. A change is treated as a change in accounting estimate, applied from now on, not by restating past years.