Depreciation spreads the cost of a non-current asset over the years it is used. Each year it reduces profit and lowers the asset’s carrying amount, without any cash leaving the business.
This lesson is part of year-end adjustments. The matching idea is the same one used in accruals and prepayments.
What are the two methods?
Straight-line uses the same amount every year: (cost − residual value) ÷ useful life. Reducing balance uses a fixed percentage of the carrying amount at the start of each year.
The carrying amount is cost minus accumulated depreciation.
Worked example: equipment costing RM25 000
A business buys equipment for RM25 000 on the first day of the year. The expected residual value is RM2 500 and the useful life is 5 years.
Straight-line. Each year’s depreciation is (25 000 − 2 500) ÷ 5 = RM4 500. After year 2, accumulated depreciation is RM9 000 and the carrying amount is RM16 000.
Reducing balance at 20%. Year 1 is 20% of 25 000 = RM5 000, leaving a carrying amount of RM20 000. Year 2 is 20% of 20 000 = RM4 000, leaving RM16 000.
| Year | Straight-line charge | Reducing balance charge |
|---|---|---|
| 1 | 4 500 | 5 000 |
| 2 | 4 500 | 4 000 |
| Carrying amount after year 2 | 16 000 | 16 000 |
The two methods happen to reach the same carrying amount after year 2 in this example, but the charge in each year differs.
What is the entry?
Each year, debit Depreciation expense and credit Accumulated depreciation. The expense goes to the income statement.
The asset account stays at its original cost. The accumulated depreciation account is deducted from it in the statement of financial position, so the cost is still visible.
The mistake that loses marks
The common slip is to apply the reducing balance percentage to the original cost every year. In year 2 that gives RM5 000 again instead of RM4 000.
A second slip is to credit the asset account directly. This hides the original cost, and SPM answers normally keep cost and accumulated depreciation separate.
Check yourself
A machine is bought for RM40 000 with a residual value of RM4 000 and a useful life of 6 years. Find the straight-line depreciation and the carrying amount after 2 years. Then a delivery van bought for RM60 000 is depreciated by 20% reducing balance. Find the year 2 depreciation.
Answer
Machine: (40 000 − 4 000) ÷ 6 = RM6 000 per year. After 2 years, accumulated depreciation is 12 000, so the carrying amount is 40 000 − 12 000 = RM28 000.
Van: year 1 is 20% of 60 000 = 12 000, leaving 48 000. Year 2 is 20% of 48 000 = RM9 600, leaving a carrying amount of RM38 400.
What to study next
See where these figures land in connecting adjustments to both financial statements. Then test the set with the adjustments practice set.
For a teacher to go through depreciation on your own questions, see online one-to-one Accounting tuition.