Depreciation is the allocation of the cost of a non-current asset over its useful life as an expense. It reflects the wear and use of assets such as vehicles and fittings.
Straight-Line Method
The straight-line method charges the same depreciation every year.
Key idea
Straight-line depreciation = (Cost − Residual value) ÷ Useful life. Or: Depreciation = Percentage × Cost.
Reducing-Balance Method
The reducing-balance method applies a fixed percentage to the net book value (cost − accumulated depreciation), so depreciation falls each year.
Accumulated Depreciation and Net Book Value
Accumulated depreciation is the total depreciation since the asset was acquired. The yearly entry is: Dr Depreciation expense, Cr Accumulated depreciation. In the statement of financial position, accumulated depreciation is deducted from cost to give the net book value.
Example
A machine costs RM20,000 with a residual value of RM2,000 and a life of 5 years. Straight-line: (RM20,000 − RM2,000) ÷ 5 = RM3,600 per year. After 2 years, accumulated depreciation is RM7,200 and net book value is RM20,000 − RM7,200 = RM12,800.
Choosing a Method
The straight-line method suits assets that give even benefit each year, such as furniture and buildings. The reducing-balance method suits assets that lose value quickly in the early years, such as vehicles and computers. Note that depreciation is not a cash fund; it is only an entry that spreads out cost. An asset can still be used even when its book value is low, and land is normally not depreciated because its useful life is unlimited.
Remember
Straight-line: equal depreciation each year based on cost. Reducing-balance: depreciation shrinks, based on net book value. Net book value = Cost − Accumulated depreciation.