Why is "Applying the rate to cost every year" a common mistake in Reducing Balance Depreciation?

Why it happens: Confusing it with straight-line. How to avoid it: After Year 1, apply the rate to the CARRYING VALUE (cost − accumulated depreciation), not to cost. Source: 9706 Examiner Reports

Why is "Multiplying cost by (1 − rate)^n incorrectly or skipping years" a common mistake in Reducing Balance Depreciation?

Why it happens: Trying to shortcut the schedule. How to avoid it: Work year by year (or use cost × (1 − rate)ⁿ carefully); show each year's charge to earn the marks. Source: 9706 Examiner Reports

Why is "Deducting a residual value before applying the rate" a common mistake in Reducing Balance Depreciation?

Why it happens: Carrying over the straight-line formula. How to avoid it: Reducing balance applies the rate to the full carrying value; residual value is not deducted in the formula. Source: 9706 Examiner Reports

Why is "Expecting the carrying value to reach zero" a common mistake in Reducing Balance Depreciation?

Why it happens: Assuming it behaves like straight-line. How to avoid it: Reducing balance approaches zero but never reaches it; a small carrying value always remains. Source: 9706 Examiner Reports

Why is "Rounding too early and carrying errors forward" a common mistake in Reducing Balance Depreciation?

Why it happens: Rounding each year's carrying value prematurely. How to avoid it: Keep figures to the required precision (often 2 decimal places) so the carrying value stays accurate for the next year. Source: 9706 Examiner Reports

Why is "Justifying the method by 'it gives less tax' or vague reasons" a common mistake in Reducing Balance Depreciation?

Why it happens: Not using the matching principle. How to avoid it: Justify by the pattern of benefit: vehicles lose value fast early and cost more to repair later, so reducing balance matches. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Reducing Balance Depreciation

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Detailed Study Notes

Detailed notes on Accounting for Non-Current Assets for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Reducing Balance Depreciation — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

The method for assets that lose value fastest early on. Learn to apply a fixed percentage to the falling carrying value, build the schedule, see why the charge declines each year, and explain why reducing balance suits vehicles and machinery — plus how it differs from straight-line.

At a glance

Reducing balance charges a fixed % of the carrying value each year → a falling charge.
Depreciation = carrying value × rate% (Year 1 uses cost; later years use the reduced carrying value).
The charge is highest in Year 1 and decreases every year.
It never reaches zero — the carrying value gets smaller but never fully disappears.
Best for assets that lose more value early and need more repairs later (vehicles, machinery).
Combined with rising repairs, it gives a more even total cost over the asset's life.
Contrast: straight-line uses cost (constant charge); reducing balance uses carrying value (falling charge).

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.3.2 — Calculate depreciation using the reducing balance method.
1.3.2 — Identify the most appropriate method of calculating depreciation.
Link 1.3.2 — record depreciation through the provision for depreciation account.

How reducing balance works

Apply the rate to the carrying value, which falls each year.

The reducing (diminishing) balance method charges a fixed percentage of the asset's carrying value each year:

$\text{Depreciation} = \text{Carrying value} \times \text{Rate \%}$

Year 1: the carrying value is the cost, so depreciation = cost × rate%.
Year 2 onwards: the carrying value has fallen, so the same rate gives a smaller charge.

Example. A vehicle costs $20,000, depreciated at 25% reducing balance:

Year 1: 25% × 20,000 = $5,000 → carrying value 15,000.
Year 2: 25% × 15,000 = $3,750 → carrying value 11,250.
Year 3: 25% × 11,250 = $2,812.50 → carrying value 8,437.50.

The charge falls each year because it is based on the shrinking carrying value.

Depreciation = carrying value × rate% each year.
Year 1 uses cost; later years use the reduced carrying value.
The charge falls every year (highest in Year 1).
Residual value is normally not used in the formula.

See the full worked example for reducing balance depreciation →

The schedule and why it never reaches zero

Each year the rate bites a smaller chunk, so the value approaches but never hits zero.

Tracking the $20,000 vehicle at 25% reducing balance:

Year	Depreciation (25% of CV) $	Carrying value $
Cost		20 000.00
1	5 000.00	15 000.00
2	3 750.00	11 250.00
3	2 812.50	8 437.50
4	2 109.38	6 328.12

Because each year's charge is a percentage of a smaller balance, the carrying value falls by less each year and approaches zero without ever reaching it. This contrasts with straight-line, where the carrying value falls in equal steps to the residual value.

Carrying value falls by a smaller amount each year.
It approaches zero but never reaches it.
Straight-line falls in equal steps; reducing balance falls in shrinking steps.
Round to the nearest cent/dollar as the question requires.

See the full worked example for reducing balance depreciation →

When reducing balance is the right choice

For assets that lose value fast early and cost more to maintain later.

Why use it:

Many assets — especially vehicles and machinery — lose more value in their early years (a new vehicle drops in value quickly). The high early charge matches this.
As these assets age, repair costs rise. Reducing balance charges less depreciation later, so the total cost (depreciation + repairs) is more even across the asset's life.

Advantages: matches the faster early loss of value; smooths the total cost when combined with rising repairs.

Disadvantages: more complex than straight-line; the carrying value never reaches zero; the rate is harder to set to reflect a specific residual value.

Choosing between methods is a matching decision: pick the pattern that best reflects how the asset's benefit (and value) is consumed, then apply it consistently.

Suits assets that lose value fast early (vehicles, machinery).
High early charge + rising later repairs → even total cost.
Advantages: matches early value loss, smooths total cost.
Disadvantages: more complex, never reaches zero.

See the full worked example for reducing balance depreciation →

Quick recap

Reducing balance: depreciation = carrying value × rate% each year.
Year 1 uses cost; later years use the falling carrying value.
The charge falls each year and the carrying value never reaches zero.
Suits assets that lose value fast early and need more repairs later (vehicles).
Combined with rising repairs, it gives a more even total cost.
Choose by matching; apply consistently.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Reducing balance depreciation = carrying value × rate%.
Year 1 charge is on COST; later years on the reduced carrying value.
The charge falls each year; the carrying value never reaches zero.
Reducing balance suits assets that lose value fast early (vehicles).

How it’s examined

Tested on Paper 1 and Paper 2 through multi-year calculations, schedules, carrying values, and explaining/justifying the choice of method (2-6 marks, point-based). Examiner reports note candidates applying the rate to cost every year (that is straight-line) instead of to the falling carrying value.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Reducing Balance Depreciation

Step-by-step solutions to past-paper-style questions on reducing balance depreciation, written exactly the way a tutor would explain them at the board.

Question type:

1First-year charge (3 marks)
Getting startedDirect calculation• 9706 Paper 1/2 style• reducing balance, AO2
Question
A machine costs $40,000 and is depreciated at 20% reducing balance. Calculate the depreciation for the first year. (3 marks)
Step-by-step solution
1. Step 1
  Year 1 carrying value = cost = $40,000.
2. Step 2
  Depreciation = 20% × 40,000.
  $= 20\% \times 40{,}000$
3. Step 3
  = $8,000.
Answer
Year 1 depreciation = $8,000.
Examiner tip
In Year 1 the carrying value equals cost, so the charge is on cost.
2Depreciation over three years (5 marks)
Building confidenceMulti-step problem• reducing balance, AO2
Question
A vehicle costs $30,000 and is depreciated at 25% reducing balance. Calculate the depreciation for each of the first three years. (5 marks)
Step-by-step solution
1. Step 1
  Year 1: 25% × 30,000 = $7,500 → carrying value 22,500.
2. Step 2
  Year 2: 25% × 22,500 = $5,625 → carrying value 16,875.
3. Step 3
  Year 3: 25% × 16,875 = $4,218.75 → carrying value 12,656.25.
Answer
Y1 $7,500; Y2$ 5,625; Y3 $4,218.75 (charge falls each year).
Examiner tip
Apply the rate to the REDUCED carrying value each year, not to cost.
3Schedule with carrying values (5 marks)
Building confidenceMulti-step problem• schedule, AO2
Question
Equipment costing $50,000 is depreciated at 20% reducing balance. Prepare a schedule showing depreciation and carrying value for three years. (5 marks)
Step-by-step solution
1. Step 1
  Year 1: 20% × 50,000 = 10,000 → CV 40,000.
2. Step 2
  Year 2: 20% × 40,000 = 8,000 → CV 32,000.
3. Step 3
  Year 3: 20% × 32,000 = 6,400 → CV 25,600.
Answer
Depreciation Y1 $10,000, Y2$ 8,000, Y3 $6,400; CV at end$ 25,600.
Examiner tip
Each year's charge is smaller because the carrying value is smaller.
4Carrying value after two years (4 marks)
Building confidenceMulti-step problem• carrying value, AO2
Question
A machine costing $25,000 is depreciated at 30% reducing balance. Calculate its carrying value after two years. (4 marks)
Step-by-step solution
1. Step 1
  Year 1: 30% × 25,000 = 7,500 → CV 17,500.
2. Step 2
  Year 2: 30% × 17,500 = 5,250 → CV 12,250.
3. Step 3
  Carrying value after two years = $12,250.
Answer
Carrying value = $12,250.
Examiner tip
Work year by year; you cannot shortcut by multiplying cost by 60%.
5Compare with straight-line (6 marks)
StretchMulti-step problem• comparison, AO2
Question
A machine costs $16,000. Compare the Year 1 and Year 2 depreciation under (a) 25% reducing balance and (b) straight-line over 4 years with no residual value. (6 marks)
Step-by-step solution
1. Step 1
  Reducing balance Y1: 25% × 16,000 = $4,000; Y2: 25% × 12,000 = $3,000.
2. Step 2
  Straight-line: 16,000 ÷ 4 = $4,000 each year (Y1 and Y2 both $4,000).
3. Step 3
  Year 1 charges are the same ($4,000) here, but reducing balance charges less in Year 2 ($3,000 vs $4,000).
4. Step 4
  So reducing balance front-loads the charge relative to straight-line over time.
Answer
RB: Y1 $4,000, Y2$ 3,000. SL: $4,000 each year. RB charges less in later years (front-loaded).
Examiner tip
Show both methods clearly; the key point is RB declines while SL stays constant.
6Total depreciation for two assets (5 marks)
StretchMulti-step problem• reducing balance, AO2
Question
At the start of Year 2 a business owns Machine P (carrying value $18,000) and Machine Q (carrying value$ 9,000), both depreciated at 20% reducing balance. Calculate the total depreciation for Year 2. (5 marks)
Step-by-step solution
1. Step 1
  Machine P: 20% × 18,000 = $3,600.
2. Step 2
  Machine Q: 20% × 9,000 = $1,800.
3. Step 3
  Total Year 2 depreciation = 3,600 + 1,800 = $5,400.
Answer
Total Year 2 depreciation = $5,400.
Examiner tip
Apply the rate to each asset's carrying value at the start of the year.
7Find the carrying value to a target (5 marks)
StretchMulti-step problem• reducing balance, AO2
Question
A machine costs $64,000 and is depreciated at 25% reducing balance. After how many full years does its carrying value first fall below$ 25,000? (5 marks)
Step-by-step solution
1. Step 1
  Year 1: CV = 64,000 × 0.75 = 48,000.
2. Step 2
  Year 2: CV = 48,000 × 0.75 = 36,000.
3. Step 3
  Year 3: CV = 36,000 × 0.75 = 27,000.
4. Step 4
  Year 4: CV = 27,000 × 0.75 = 20,250 — below 25,000.
5. Step 5
  So it first falls below $25,000 after 4 years.
Answer
After 4 years (carrying value $20,250).
Examiner tip
Each year multiply the carrying value by (1 − rate) = 0.75.
8Why reducing balance suits vehicles (5 marks)
StretchWord problem• method choice, AO3
Question
Explain why the reducing balance method is often considered the most appropriate for depreciating motor vehicles. (5 marks)
Step-by-step solution
1. Step 1
  Vehicles lose more value in their early years (a new vehicle drops quickly).
2. Step 2
  Reducing balance charges more depreciation early, matching this faster early loss.
3. Step 3
  As vehicles age, repair costs rise.
4. Step 4
  Reducing balance charges less depreciation later, so the total cost (depreciation + repairs) is more even over the life.
5. Step 5
  This better matches the pattern of benefit and cost than straight-line.
Answer
Vehicles lose value fast early (matched by the high early charge) and cost more to repair later (offset by the lower later charge), giving an even total cost.
Examiner tip
Two strands: faster early value loss AND rising repairs — both point to reducing balance.
9Limitation of reducing balance (4 marks)
StretchWord problem• evaluation, AO3
Question
State and explain two disadvantages of the reducing balance method. (4 marks)
Step-by-step solution
1. Step 1
  More complex to calculate than straight-line (must compute the carrying value each year).
2. Step 2
  The carrying value never reaches zero, so a fully-used asset still shows a small balance.
3. Step 3
  (Also: the rate is harder to set to reflect a specific residual value.)
Answer
More complex to calculate; the carrying value never reaches zero (also harder to set the rate).
Examiner tip
Two clear, distinct disadvantages each score.
10Justify a method for two asset types (6 marks)
StretchWord problem• method choice, AO3
Question
A business uses reducing balance for its delivery fleet and straight-line for its office partitions. Justify both choices. (6 marks)
Step-by-step solution
1. Step 1
  Method should match the pattern of benefit of each asset (consistency thereafter).
2. Step 2
  Delivery fleet: vehicles lose value fast early and cost more to repair later → reducing balance matches this (high early charge, lower later).
3. Step 3
  This gives a more even total cost of running the fleet over time.
4. Step 4
  Office partitions: used evenly with little change in benefit year to year → straight-line (equal charge) matches this.
5. Step 5
  Straight-line is also simpler for low-risk, evenly-used assets.
6. Step 6
  Conclusion: different methods are justified because the patterns of use differ; each is then applied consistently.
Answer
Reducing balance for vehicles (fast early loss + rising repairs); straight-line for partitions (even use, simple). Methods match each asset's pattern.
Examiner tip
Justify each separately by the pattern of benefit; note consistency once chosen.

Model Answers — Reducing Balance Depreciation

High-scoring sample answers for reducing balance depreciation on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style3 marks
Q (3 marks). A machine costing $36,000 is depreciated at 25% reducing balance. Calculate the depreciation for the first year.
Model answer
Year 1 carrying value = cost = $36,000. Depreciation = 25% × 36,000 = $9,000.
Why this scores
Marking (point-based, 3). CV = cost in Year 1 (1); apply 25% (1); $9,000 (1).
Question 2
9706 Paper 2 style4 marks
Q (4 marks). A vehicle costing $24,000 is depreciated at 20% reducing balance. Calculate the depreciation for Year 1 and Year 2.
Model answer
Year 1: 20% × 24,000 = $4,800 → carrying value 19,200. Year 2: 20% × 19,200 = $3,840.
Why this scores
Marking (point-based, 4). Y1 $4,800 (2); apply 20% to CV$ 19,200 (1); Y2 $3,840 (1).
Question 3
9706 Paper 2 style5 marks
Q (5 marks). Equipment costing $60,000 is depreciated at 30% reducing balance. Prepare a schedule of depreciation and carrying value for three years.
Model answer

Year Depreciation (30% of CV) $ Carrying value $
1 18 000 42 000
2 12 600 29 400
3 8 820 20 580
Why this scores
Marking (point-based, 5). Y1 $18,000 (1); Y2$ 12,600 (1.5); Y3 $8,820 (1.5); carrying values (1).
Question 4
9706 Paper 2 style5 marks
Q (5 marks). A machine cost $80,000 and is depreciated at 25% reducing balance. Calculate (a) the depreciation in Year 3 and (b) the carrying value at the end of Year 3.
Model answer
Year 1: 25% × 80,000 = 20,000 → CV 60,000. Year 2: 25% × 60,000 = 15,000 → CV 45,000. Year 3: 25% × 45,000 = $11,250 → CV = 45,000 − 11,250 = $33,750.
Why this scores
Marking (point-based, 5). Y1 & Y2 carrying values (2); Year 3 depreciation $11,250 (2); CV$ 33,750 (1).
Question 5
9706 Paper 2 style6 marks
Q (6 marks). A machine costs $20,000. (a) Calculate Year 1 and Year 2 depreciation under 20% reducing balance. (b) Calculate the annual depreciation under straight-line over 5 years (no residual value). (c) State one difference in the pattern of the charge.
Model answer
(a) Reducing balance: Y1 = 20% × 20,000 = $4,000 (CV 16,000); Y2 = 20% × 16,000 = $3,200.

(b) Straight-line: 20,000 ÷ 5 = $4,000 each year.

(c) Difference: under reducing balance the charge falls each year (4,000 then 3,200), whereas under straight-line it is constant (4,000 every year).
Why this scores
Marking (point-based, 6). RB Y1 $4,000 (1) + Y2$ 3,200 (2); SL $4,000 (1); difference — RB falls, SL constant (2).
Question 6
9706 Paper 2/3 style5 marks
Q (5 marks). A machine costing $50,000 is depreciated at 40% reducing balance. After how many full years does the carrying value first fall below$ 11,000?
Model answer
Each year CV × (1 − 0.40) = CV × 0.60.

Year 1: 50,000 × 0.6 = 30,000.

Year 2: 30,000 × 0.6 = 18,000.

Year 3: 18,000 × 0.6 = 10,800 — below $11,000.

It first falls below $11,000 after 3 years (carrying value $10,800).
Why this scores
Marking (point-based, 5). Year-by-year carrying values (3); identify Year 3 / $10,800 (2).
Question 7
9706 Paper 2/3 style6 marks
Q (6 marks). At 1 January 2025 a business owns Machine A (cost $40,000, bought 1 Jan 2023) and Machine B (cost$ 25,000, bought 1 Jan 2024), both depreciated at 20% reducing balance with a full year's charge in the year of purchase. Calculate the total depreciation charge for the year ended 31 December 2025.
Model answer
Machine A (bought 2023): CV at 1 Jan 2025 = 40,000 × 0.8 × 0.8 = 25,600. Depreciation 2025 = 20% × 25,600 = $5,120.

Machine B (bought 2024): CV at 1 Jan 2025 = 25,000 × 0.8 = 20,000. Depreciation 2025 = 20% × 20,000 = $4,000.

Total depreciation for 2025 = 5,120 + 4,000 = $9,120.
Why this scores
Marking (point-based, 6). Machine A CV $25,600 + charge$ 5,120 (3); Machine B CV $20,000 + charge$ 4,000 (2); total $9,120 (1).
Question 8
9706 Paper 2/3 style4 marks
Q (4 marks). Explain why the reducing balance method may be considered more appropriate than straight-line for a delivery vehicle.
Model answer
A delivery vehicle loses more of its value in the early years, so reducing balance — which charges more depreciation early and less later — matches the actual pattern of value lost better than the equal charge of straight-line.

In addition, as the vehicle ages its repair costs rise; the falling depreciation charge under reducing balance offsets this, so the total cost (depreciation + repairs) is more even across the vehicle's life.
Why this scores
Marking (point-based, 4). Faster early value loss matched by high early charge (~2); rising repairs offset → even total cost (~2).
Question 9
9706 Paper 3 evaluation style6 marks
Q (6 marks). Discuss the disadvantages of using the reducing balance method of depreciation.
Model answer
More complex to calculate. Unlike straight-line (a fixed amount), reducing balance requires the carrying value to be recalculated each year before applying the rate, increasing the chance of error.

Never reaches zero. The carrying value approaches but never reaches zero, so even a fully-used asset still shows a residual carrying amount, which can misrepresent a worn-out asset.

Harder to set the rate. It is more difficult to choose a rate that reflects a particular residual value or useful life than simply spreading the cost over the years.

Uneven early charge. The high charge in the early years significantly reduces early-year profit, which may not suit every asset (e.g. one used evenly).

Conclusion. Reducing balance is well-suited to assets that lose value quickly early on (vehicles, machinery), but for assets used evenly the simpler straight-line method is preferable; the business should choose by matching the method to the asset and apply it consistently.
Why this scores
Marking (point-based, ~6). Each developed disadvantage (complexity, never reaches zero, rate-setting, uneven charge) scores; supported conclusion about when it is/ isn't suitable.
Question 10
9706 Paper 3 evaluation style6 marks
Q (6 marks). A business uses the reducing balance method for vehicles and the straight-line method for office equipment. Explain whether using two different methods is acceptable.
Model answer
It is acceptable. The accounting requirement is that the depreciation method should match the pattern in which each asset's benefits are consumed, and then be applied consistently to that asset.

Vehicles — reducing balance. Vehicles lose value fast in the early years and incur rising repairs, so reducing balance (high early charge, lower later) matches this and gives a more even total cost.

Office equipment — straight-line. If the equipment is used evenly over its life, an equal yearly charge (straight-line) best matches its benefit and is simpler.

Consistency. Using different methods for different classes of asset does not breach the consistency concept — consistency requires the same method for the same asset/class over time, not the same method for every asset.

Conclusion. It is acceptable to use two methods provided each is justified by the asset's usage pattern and applied consistently to that class of asset year on year.
Why this scores
Marking (point-based, ~6). Match method to pattern of benefit (~1.5); justify each method (~2.5); consistency = same method per asset over time, not across all assets (~1.5); conclusion.

Year	Depreciation (30% of CV) $	Carrying value $
1	18 000	42 000
2	12 600	29 400
3	8 820	20 580

Key Formulae — Reducing Balance Depreciation

The formulae you need to memorise for reducing balance depreciation on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Reducing balance depreciation
$Depreciation = Carrying\ value \times Rate\%$
$Carrying value$
cost in Year 1; cost − accumulated depreciation thereafter
$Rate%$
fixed reducing-balance rate applied each year
When to use
Each year, applying the rate to the falling carrying value.
Example
Year 2: 25% × 22,500 = 5,625.

Key Definitions and Keywords — Reducing Balance Depreciation

Definitions to memorise and the exact keywords mark schemes credit for reducing balance depreciation answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Reducing (diminishing) balance method
Examiner keyword
A depreciation method that charges a fixed percentage of the asset's carrying value each year, giving a falling charge.
Carrying value
Examiner keyword
Cost less accumulated depreciation; the base to which the reducing-balance rate is applied each year.
Reducing-balance rate
The fixed percentage applied to the carrying value each year under the reducing balance method.
Front-loaded depreciation
Examiner keyword
A pattern (as in reducing balance) where more depreciation is charged in the early years.
Total cost of use
Depreciation plus repairs in a year; reducing balance can make this more even over an asset's life.

Common Mistakes and Misconceptions — Reducing Balance Depreciation

The traps other students keep falling into on reducing balance depreciation questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Applying the rate to cost every year
9706 Examiner Reports
Why it happens
Confusing it with straight-line.
How to avoid it
After Year 1, apply the rate to the CARRYING VALUE (cost − accumulated depreciation), not to cost.
✕Multiplying cost by (1 − rate)^n incorrectly or skipping years
9706 Examiner Reports
Why it happens
Trying to shortcut the schedule.
How to avoid it
Work year by year (or use cost × (1 − rate)ⁿ carefully); show each year's charge to earn the marks.
✕Deducting a residual value before applying the rate
9706 Examiner Reports
Why it happens
Carrying over the straight-line formula.
How to avoid it
Reducing balance applies the rate to the full carrying value; residual value is not deducted in the formula.
✕Expecting the carrying value to reach zero
9706 Examiner Reports
Why it happens
Assuming it behaves like straight-line.
How to avoid it
Reducing balance approaches zero but never reaches it; a small carrying value always remains.
✕Rounding too early and carrying errors forward
9706 Examiner Reports
Why it happens
Rounding each year's carrying value prematurely.
How to avoid it
Keep figures to the required precision (often 2 decimal places) so the carrying value stays accurate for the next year.
✕Justifying the method by 'it gives less tax' or vague reasons
9706 Examiner Reports
Why it happens
Not using the matching principle.
How to avoid it
Justify by the pattern of benefit: vehicles lose value fast early and cost more to repair later, so reducing balance matches.

Reducing Balance Depreciation

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1First-year charge (3 marks)

2Depreciation over three years (5 marks)

3Schedule with carrying values (5 marks)

4Carrying value after two years (4 marks)

5Compare with straight-line (6 marks)

6Total depreciation for two assets (5 marks)

7Find the carrying value to a target (5 marks)

8Why reducing balance suits vehicles (5 marks)

9Limitation of reducing balance (4 marks)

10Justify a method for two asset types (6 marks)

Reducing balance depreciation

Reducing (diminishing) balance method

Carrying value

Reducing-balance rate

Front-loaded depreciation

Total cost of use

✕Applying the rate to cost every year

✕Multiplying cost by (1 − rate)^n incorrectly or skipping years

✕Deducting a residual value before applying the rate

✕Expecting the carrying value to reach zero

✕Rounding too early and carrying errors forward

✕Justifying the method by 'it gives less tax' or vague reasons