Financial Accounting · Tangible non-current assets

Depreciation Methods and Calculation for ACCA FA

Updated 11 October 2026 · Fact-checked

Depreciation spreads the cost of a non-current asset, less its residual value, over its useful life (IAS 16). Straight-line charges (cost − residual value) ÷ life each year. Reducing balance charges a fixed percentage of carrying amount. If the useful life changes, spread the carrying amount over the remaining life.

Understand Depreciation Methods and Calculation

A non-current asset such as a machine helps a business earn income for several years. The matching idea says its cost should be charged against the income it helps earn. Depreciation does this. It is an allocation of cost, not a measure of market value and not a way of saving cash.

IAS 16 says the depreciable amount is cost less residual value. Cost includes the purchase price plus costs needed to bring the asset to its location and condition for use, such as delivery and installation. Residual value is the amount you expect to get from selling the asset at the end of its life, after disposal costs. The useful life is the period over which the business expects to use the asset.

The straight-line method gives the same charge every year. It suits assets that give equal benefit each year. The reducing balance method applies a fixed percentage to the carrying amount at the start of each year. The charge is high early and falls over time. It suits assets that lose more benefit early, such as vehicles.

Carrying amount is cost less accumulated depreciation. If the business changes its estimate of useful life or residual value, or changes the depreciation method, this is a change in accounting estimate (IAS 16 and IAS 8). It is applied from the date of change only. You do not restate past years. You take the carrying amount at the date of change, less the new residual value, and spread it over the remaining useful life. Depreciation is charged to profit or loss, and accumulated depreciation is deducted from the asset in the statement of financial position.

Key formulas to remember

Depreciable amount: Cost − residual value; Cost includes delivery and installation. Under reducing balance the percentage is applied to carrying amount, not to this figure.
Straight-line annual charge: (Cost − residual value) ÷ useful life in years; Same charge every full year.
Reducing balance annual charge: Opening carrying amount × depreciation rate %; The rate is applied to carrying amount without first deducting residual value. Depreciation should not take the carrying amount below residual value. The rate is usually given in the question.
Carrying amount: Cost − accumulated depreciation; This is the figure shown in the statement of financial position.
Change in estimate: (Carrying amount at date of change − new residual value) ÷ remaining useful life; Apply from the date of change. Do not adjust prior years.
Depreciation journal: Dr Depreciation expense (profit or loss); Cr Accumulated depreciation; Accumulated depreciation is a separate account per asset class and is deducted from cost.

How to solve Depreciation Methods and Calculation questions

Use this order for any depreciation question. It keeps you from mixing up the methods or the years.

1Find the cost of the asset, including delivery and installation, and exclude costs such as training or repairs.
2Note the method, the rate or useful life, and the residual value.
3Check the time period: how many months did you hold the asset in the year? Note the company's policy for the year of purchase.
4Calculate the annual charge: straight-line uses (cost − residual) ÷ life. Reducing balance uses carrying amount × rate.
5Build up accumulated depreciation year by year and work out the carrying amount at each year end.
6If an estimate changes, take the carrying amount at that date, deduct new residual value and divide by remaining life.
7Check what is asked: the charge for the year, accumulated depreciation, carrying amount, or the journal. Answer that figure only.

Quickest way: Carrying amount first, then one line of arithmetic

When to use it: Use in the objective test when a question asks for a single year's charge or a carrying amount.

Straight-line: write (cost − residual) ÷ life, then multiply by the number of years if asked for accumulated depreciation.
Reducing balance: write the carrying amount and multiply by the rate. Repeat once per year. Do not use a formula with powers unless it is easy.
For a change in estimate, restart the calculation from the carrying amount at the change date.
Eliminate answer options that ignore residual value in straight-line, or that deduct residual value before applying the reducing balance rate. Also reject any option that takes the carrying amount below residual value.

Common mistakes in Depreciation Methods and Calculation

Deducting residual value before applying the reducing balance rate.
Students carry over the straight-line habit.
Fix: In reducing balance, apply the rate to the carrying amount without first deducting residual value. Just check that depreciation does not take the carrying amount below residual value.
Applying the reducing balance rate to original cost every year.
It feels like a fixed charge, as in straight-line.
Fix: Each year, recalculate on the opening carrying amount (cost less accumulated depreciation to date).
Restating previous years when the useful life changes.
Students think the earlier charge was wrong.
Fix: A change in estimate is applied from now on. Use the current carrying amount and the remaining life.
Using the total useful life instead of the remaining life after a change.
The question gives a new total life and students divide by it.
Fix: Work out remaining years: new total life less years already used. Divide the carrying amount less residual value by that.
Including the wrong costs in the asset's cost.
Students add all costs listed in the question.
Fix: Include price, delivery, installation and the costs of testing that the asset is functioning properly. Exclude staff training and general overheads, which are expenses.
Crediting the asset cost account in the depreciation journal.
It seems natural to reduce the asset directly.
Fix: Credit accumulated depreciation. The cost account stays at original cost.

Worked examples

Example 1

A company buys a machine on 1 January Year 1 for $50,000 plus $2,000 delivery and installation. Residual value is $4,000 and useful life is 6 years. It uses straight-line depreciation. What is the carrying amount at 31 December Year 3?

Show the solution

Cost = 50,000 + 2,000 = $52,000.
Depreciable amount = 52,000 − 4,000 = $48,000.
Annual charge = 48,000 ÷ 6 = $8,000.
Accumulated depreciation after 3 years = 8,000 × 3 = $24,000.
Carrying amount = 52,000 − 24,000 = $28,000.

Answer: $28,000

Example 2

A vehicle cost $40,000 on 1 January Year 1. The company depreciates vehicles at 25% a year on the reducing balance method. At the start of Year 3, management revises the asset's remaining useful life to 4 years from that date, with a residual value of $3,000 and a switch to straight-line from that date. Calculate the depreciation charge for Year 3.

Show the solution

Year 1 charge = 40,000 × 25% = $10,000. Carrying amount = $30,000.
Year 2 charge = 30,000 × 25% = $7,500. Carrying amount at 1 January Year 3 = $22,500.
Change in estimate: depreciable amount = 22,500 − 3,000 = $19,500.
Spread over remaining life of 4 years: 19,500 ÷ 4 = $4,875.
No adjustment is made to Years 1 and 2.

Answer: $4,875

Exam tips

Read what the question asks for: the annual charge, accumulated depreciation or carrying amount. Many wrong options are the right working but the wrong figure.
In number entry questions, check the units, sign and rounding instructions before you type.
Look for hidden cost items: delivery, installation and testing that the asset works properly go into cost. Repairs, staff training and general overheads do not.
For a change in estimate, always find the carrying amount at the change date first, then use the remaining life.
Multiple response questions often test the journal or the method difference. Remember reducing balance gives a higher charge in early years and a lower charge later.

Practice questions from Tangible non-current assets

Depreciation Methods and Calculation 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 and Calculation: frequently asked questions

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

Straight-line gives an equal charge each year based on cost less residual value. Reducing balance applies a fixed percentage to the falling carrying amount, so the charge is higher early and lower later. Over the asset's life the total charge is cost less the amount recovered on disposal, but the timing differs. A fixed-rate reducing balance does not exactly write the asset down to residual value.

Does a change in useful life affect past years?

No. Under IAS 16 and IAS 8 it is a change in accounting estimate. You apply it from the date of change and do not restate earlier years. You depreciate the current carrying amount, less new residual value, over the remaining life.

What is the journal entry for depreciation?

Debit depreciation expense in profit or loss and credit accumulated depreciation. The asset's cost account is not changed. In the statement of financial position, accumulated depreciation is deducted from cost to give the carrying amount.

Is land depreciated?

Freehold land normally has an unlimited useful life, so it is not depreciated. Buildings on the land have a finite life and are depreciated. If a question gives a combined cost, look for a split between land and buildings.