Depreciation Methods
Straight Line, Reducing Balance, and Units of Production — formulas, examples, and when to use each.
Every fixed asset depreciates. Depreciation is the systematic allocation of an asset's cost over its useful life — recognizing that the asset is being consumed as it is used. Trabalance's asset form offers three depreciation methods. The method chosen affects how much depreciation is charged in early months versus later months, and how closely the book value tracks actual economic value. The choice should be made at asset creation and is difficult to change later without creating restatement complications.
The Three Methods
Every method works from the same three inputs — Cost, Scrap Value and Useful Life (years) — and charges monthly. No method ever takes the book value below the scrap value, and charging stops once the useful life is exhausted.
| Method | Monthly charge (as posted) | Behavior Over Time | Best For |
|---|---|---|---|
| Straight Line | (Cost − Scrap Value) ÷ (Useful Life in years × 12) | Equal depreciation charge every month. Book value declines in a straight line from Cost to Scrap Value. Simple and predictable. | Assets that provide roughly equal economic benefit every year: office furniture, leasehold improvements, buildings, computers used consistently across their life. |
| Reducing Balance | Opening book value × 20% ÷ 12 | Higher charge in early months, progressively lower later. The 20% annual rate is fixed in the engine — it is not entered per asset. Book value declines exponentially and stops at the scrap value floor. | Assets that lose commercial value quickly when new but become less costly to depreciate as they age: motor vehicles, technology equipment, heavy machinery, tools. |
| Units of Production | Opening book value × (2 ÷ Useful Life in years) ÷ 12 | Charged as a double-declining rate on the opening book value: the shorter the useful life, the steeper the early charge. No units figure is entered anywhere, so the charge does not vary with actual output. | Assets you want written down fastest in their first years. |
Straight Line — Worked Example
Asset: CNC Milling Machine. Cost: 48,000.00. Scrap value: 3,000.00. Useful life: 5 years.
Monthly depreciation = (48,000.00 − 3,000.00) ÷ (5 × 12) = 750.00 per month, or 9,000.00 per year.
Depreciation schedule (annual view):
| Year | Opening book value | Annual Depreciation | Closing book value |
|---|---|---|---|
| 1 | 48,000.00 | 9,000.00 | 39,000.00 |
| 2 | 39,000.00 | 9,000.00 | 30,000.00 |
| 3 | 30,000.00 | 9,000.00 | 21,000.00 |
| 4 | 21,000.00 | 9,000.00 | 12,000.00 |
| 5 | 12,000.00 | 9,000.00 | 3,000.00 |
At the end of Year 5, the book value equals the scrap value. Depreciation stops.
Reducing Balance — Worked Example
Asset: Delivery Van. Cost: 35,000.00. Scrap value: 0. Engine rate: 20% p.a., charged monthly on the opening book value.
| Month | Opening book value | Depreciation (20% ÷ 12) | Closing book value |
|---|---|---|---|
| 1 | 35,000.00 | 583.33 | 34,416.67 |
| 2 | 34,416.67 | 573.61 | 33,843.06 |
| 3 | 33,843.06 | 564.05 | 33,279.01 |
| 12 | 29,326.72 | 488.78 | 28,837.94 |
The van charges more in its first months and progressively less as the book value falls.
Units of Production — Worked Example
Asset: Commercial Printing Press. Cost: 120,000.00. Scrap value: 10,000.00. Useful life: 5 years.
Annual rate = 2 ÷ 5 = 40%, charged monthly on the opening book value:
| Month | Opening book value | Depreciation (40% ÷ 12) | Closing book value |
|---|---|---|---|
| 1 | 120,000.00 | 4,000.00 | 116,000.00 |
| 2 | 116,000.00 | 3,866.67 | 112,133.33 |
| 3 | 112,133.33 | 3,737.78 | 108,395.55 |
The charge falls every month and never takes the book value below 10,000.00. Because no output figure is recorded, an idle month is charged the same as a busy one.
The schedule preview is not always what posts
The asset detail page draws a projected depreciation schedule. For Straight Line it matches the charge that will actually be posted. For the other two methods it does not, and the difference is worth knowing before you rely on the projection:
| Method | What the detail page projects | What is actually posted |
|---|---|---|
| Straight Line | (Cost − Scrap) ÷ periods | The same. These agree. |
| Reducing Balance | Opening book value × (1 ÷ Useful Life) | Opening book value × 20%, whatever the useful life is. The two agree only when the useful life happens to be 5 years. |
| Units of Production | Opening book value × (2 ÷ Useful Life), switching to straight line once that would give a bigger charge | Opening book value × (2 ÷ Useful Life) with no switchover, so the later periods are projected higher than they post. |
The register list and the posted journals are the figures to rely on. If a projected schedule and a posted charge disagree on a Reducing Balance or Units of Production asset, the posted charge is what happened.
Choosing a Method
| Consideration | Straight Line | Reducing Balance | Units of Production |
|---|---|---|---|
| Ease of administration | Simplest — fixed amount every month | Simple — fixed 20% rate on book value | Simple — rate derived from useful life |
| Matches economic consumption? | Good for assets with consistent utility | Good for assets that degrade in commercial value quickly | Steepest early write-down; not tied to actual usage |
| Tax planning | Lower deductions in early years | Front-loads deductions — reduces taxable profit in early years | Front-loads deductions most for short-lived assets |
| Works when asset is sometimes idle? | Yes — charges depreciation regardless of use | Yes — charges regardless of use | Yes — charges regardless of use |
The depreciation method affects both your reported profit (through P&L depreciation expense) and your balance sheet (through net book value). Different methods produce materially different results in the first years of an asset's life. For a large capital expenditure, the choice of method should align with your reporting objectives, tax jurisdiction rules, and the economic profile of the asset.
Changing Depreciation Method
The depreciation method can be changed with Edit Asset. Doing so after depreciation has been posted changes only future charges; a manual journal to adjust accumulated depreciation and a restatement of the schedule are your responsibility. This is an accounting change that must be disclosed in financial statements under most standards. Do not change the method casually — consult your accountant.
Related
- Fixed assets — the register and what each column means
- Registering an asset — where the method is chosen
- Auto-charge — turning the monthly posting on
- Disposals — what happens to accumulated depreciation at the end