Under annual depreciation method, higher depreciation charge is recognized in earlier years of asset’s life but charges lower depreciation in the later years compared to the straight line method. In other words, the reducing balance method is like the straight-line method on steroids. The depreciation methods only differ with respect to timing of reporting depreciation. However, the total depreciation under both methods over the life of the asset is almost same.
Solved Example – Calculation of Annual Depreciation under Reducing Balance and Straight Line Methods:
A business purchased a new vehicle for $30000 on 1st July 2018. The vehicle is expected to have a scrap value of $5000 after its estimated useful life of four years. The business decided to use reducing balance method of depreciation at the rate of 36%. The accounting year of the business ends on 30 June 2019.
Calculate annual depreciation charge under both straight line and reducing balance methods.
Using straight line depreciation method, the calculation of the annual depreciation charge is as follows:
Annual depreciation under both depreciation methods are summed up as follows:
In the above example, the total depreciation charged in the first two years 2018-2019 was $17712. (Compared with $12500, if a straight line depreciation method would have been used).