Reducing-balance depreciation applies a fixed percentage to the carrying amount at the start of each year. The charge is largest in Year 1 and smaller every year after that. You need it for the income statement charge and for the asset’s carrying amount in the statement of financial position.
It follows on from straight-line depreciation, where the charge stays the same. This lesson belongs to the depreciation and asset disposal module.
How does the reducing-balance method work?
The key difference is the base. In straight-line, the base is always the original cost. In reducing balance, the base is what is left in the books at the start of the year.
- Year 1 base = cost. Charge = base × rate.
- Carrying amount at the end of the year = base − charge.
- That carrying amount becomes the next year’s base.
- Repeat for each year the question asks for.
The entries are the same as before: debit depreciation expense, credit accumulated depreciation. Only the amount changes.
Worked example
Seri Metal Works buys a cutting machine for RM 40,000. It depreciates machines at 20% a year on the reducing balance. Find the charge for each of the first 3 years and the carrying amount at the end of Year 3.
Step 1, set up a table with the opening carrying amount, the charge and the closing carrying amount.
| Year | Opening carrying amount (RM) | Charge at 20% (RM) | Closing carrying amount (RM) |
|---|---|---|---|
| 1 | 40,000 | 8,000 | 32,000 |
| 2 | 32,000 | 6,400 | 25,600 |
| 3 | 25,600 | 5,120 | 20,480 |
Step 2, check each line: 40,000 × 20% = 8,000, and 40,000 − 8,000 = 32,000. Then 32,000 × 20% = 6,400, and 32,000 − 6,400 = 25,600. Then 25,600 × 20% = 5,120, and 25,600 − 5,120 = 20,480.
Step 3, accumulated depreciation after Year 3: 8,000 + 6,400 + 5,120 = RM 19,520.
Step 4, second check: 40,000 − 19,520 = RM 20,480, which matches the closing carrying amount. As a third route, 40,000 × 0.8 × 0.8 × 0.8 = 40,000 × 0.512 = RM 20,480.
The Year 3 entry is debit depreciation expense RM 5,120 and credit accumulated depreciation RM 5,120.
The mistake to watch for
A common slip is to apply the percentage to the original cost in every year, which is the straight-line pattern again.
Mistaken answer: Year 2 charge = 40,000 × 20% = RM 8,000, so the carrying amount after Year 2 is RM 24,000.
This ignores that RM 8,000 has already been written off. The base for Year 2 should be RM 32,000, not RM 40,000.
The correction is to write “opening carrying amount” as the heading of the second column and never reuse the cost after Year 1. A quick sense check also helps: in reducing balance the charge must fall each year. If your figures stay equal, you have switched methods without meaning to.
How does it compare with straight-line?
Take an asset of RM 10,000 and a 20% rate.
| Year | Straight-line charge (RM) | Reducing-balance charge (RM) |
|---|---|---|
| 1 | 2,000 | 2,000 |
| 2 | 2,000 | 1,600 |
| 3 | 2,000 | 1,280 |
Reducing balance charges more in the early years and less later. The asset is never written down to zero by this method, so the carrying amount always stays above zero.
Check yourself
Try these on paper, then open each answer.
1. A vehicle costs RM 25,000 and is depreciated at 30% on the reducing balance. Find the Year 1 and Year 2 charges and the carrying amount after Year 2.
Show answer
Year 1: 25,000 × 30% = RM 7,500, carrying amount 17,500. Year 2: 17,500 × 30% = RM 5,250, carrying amount 17,500 − 5,250 = RM 12,250.
2. Equipment costing RM 12,000 is depreciated at 25% on the reducing balance. Find the accumulated depreciation after 2 years.
Show answer
Year 1: 12,000 × 25% = 3,000, carrying amount 9,000. Year 2: 9,000 × 25% = 2,250. Accumulated depreciation = 3,000 + 2,250 = RM 5,250. Check: 12,000 − 5,250 = 6,750 and 12,000 × 0.75 × 0.75 = 6,750.
3. For an asset costing RM 10,000 at 20%, which method gives the lower charge in Year 3, straight-line on cost or reducing balance?
Show answer
Straight-line: RM 2,000. Reducing balance: Year 1 charge 2,000, carrying amount 8,000; Year 2 charge 1,600, carrying amount 6,400; Year 3 charge 6,400 × 20% = RM 1,280. Reducing balance gives the lower charge in Year 3.
Where this leads next
Next, see what happens when an asset is sold: record a disposal with accumulated depreciation. When you want to test both methods together, try the depreciation and disposal practice set. The percentage-base explorer shows how a percentage applied to a changing base moves each year, and the double-entry and ledger trainer lets you check the entries.
If your tables are right but a worry remains about choosing between methods in a longer question, our teachers can go through it in online one-to-one Accounting tuition.