The document discusses reducing balance depreciation. It explains that reducing balance depreciation allocates more depreciation in the early years of an asset's life and less in later years. This is because some assets generate more revenue and are used more heavily in their early life. The document provides an example of calculating reducing balance depreciation over six years for a vehicle purchased for $30,000 using a 15% annual depreciation rate. More depreciation is allocated in the initial years, with the amounts decreasing each year as the carrying value of the asset declines.

1. 16.4
REDUCING BALANCE
DEPRECIATION

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 There are two methods of depreciation…
16.4 REDUCING BALANCE DEPRECIATION
Straight-Line Method
A method of depreciation which :
• Allocates the same amount of
depreciation each reporting
period.
Reducing-Balance Method
A method of depreciation which:
• Allocates more depreciation
in the early years of an asset’s
life
• Allocates less depreciation in
later years.
vs

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The reducing balance method of depreciation follows the
principle that:
 Some assets generate more revenue in their early life and less
in later years
 Some assets are used (consumed) more in their early life and
less in later years
16.4 REDUCING BALANCE DEPRECIATION
Vehicles MachineryEquipment

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind using reducing balance depreciation…
Reporting Period Principle
The actual amount of the asset used can be matched against the
revenue it generates each period
• More depreciation should be matched against revenue in the asset’s
early life
• Less depreciation should be matched against revenue in the asset’s
later life
16.4 REDUCING BALANCE DEPRECIATION
Vehicles MachineryEquipment

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind using reducing balance depreciation…
Relevance
• This enables an accurate profit to be determined under accrual
accounting
• Charging more depreciation in earlier periods actually represents
the way the asset is used (consumed) during its life (more in earlier
periods)
16.4 REDUCING BALANCE DEPRECIATION
Vehicles MachineryEquipment

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Example: on 1 July 2015 a business purchased a new vehicle with a
cost of $30,000
 The owner is debating whether to depreciate it using either:
16.4 REDUCING BALANCE DEPRECIATION
Straight-Line Method
• Cost $30,000
• Residual value $9,000
• Useful life 6 years
Reducing-Balance Method
• Cost $30,000
• Reducing-balance depreciation
of 15%
vs
Depreciation
expense
=
ResidualCost
Useful Life
 9,00030,000
6
3,500=
?

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Reducing balance depreciation formula…
 Example: on 1 July 2015 a business purchased a new vehicle with a
cost of $30,000 and will depreciated using reducing-balance
depreciation of 15%
Reducing Balance %=
Carrying Value
at end of period
Reducing Balance
Depreciation Expense x
16.4 REDUCING BALANCE DEPRECIATION
0 1 2 3
Cost
$30,000
30,000 x 15%
= $4,500
Carrying
Value
$25,500
Carrying
Value
$21,675
Carrying
Value
$18,42425,500 x 15%
= $3,825
21,675 x 15%
= $3,251

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 This will result in varying amounts of depreciation being charged,
with more depreciation in the early years…
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
16.4 REDUCING BALANCE DEPRECIATION
Reducing Balance %=
Carrying Value
at end of period
Reducing Balance
Depreciation Expense x
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The reducing balance method has allocated a higher amount of
depreciation during the asset’s early years to reflect its use
 This has decreased as the asset has gotten older
16.4 REDUCING BALANCE DEPRECIATION
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314
Depreciation Expense Accumulated Depreciation Carrying Value
1 15% x $30,000 = $4,500 = $4,500 $30,000 - $4,500 = $25,500
2 15% x $25,500 = $3,825 $4,500 + $3,825 = $8,325 $30,000 - $8,325 = $21,675
3 15% x $21,675 = $3,251 $8,325 + $3,251 = $11,576 $30,000 - $11,576 = $18,424
4 15% x $18,424 = $2,764 $11,576 + $2,764 = $14,340 $30,000 - $14,340 = $15,660
5 15% x $15,660 = $2,349 $14,340 + $2,349 = $16,689 $30,000 - $16,689 = $13,311
6 15% x $13,311 = $1,996 $16,689 + $1,996 = $18,685 $30,000 - $18,685 = $11,314

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
4,500
3,825
3,251
2,764
2,349
1,996
3500 3500 3500 3500 3500 3500
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Reducing balance Straight-line
16.4 REDUCING BALANCE DEPRECIATION

11. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
16.4 REDUCING BALANCE DEPRECIATION
 There is a conflict between relevance and reliability
Relevant:
• Depreciation is relevant as
it represents the expense
(amount used) of the asset
this period in order to
generate revenue
• This enables an accurate
profit to be determined
• This assists the decision-
making of the business
Depreciation is…
Reliable:
• Depreciation is not reliable
because it involves
estimates to be made of:
• Residual value
• Useful life
• Reducing balance %
• These are guesses which
can’t be verified with a
source document
Depreciation is NOT…

12. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ2 X
Ex16.1 X