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Worked example
Depreciation methods, worked through a removals firm
Depreciation spreads the cost of an asset over its life, and there is more than one way to do it. Here the two main methods are worked step by step through a removals firm’s new van.
Updated August 2026 · 8 min read
When a business buys something that lasts for years, such as a vehicle or a machine, it does not charge the whole cost to one year's profit. It spreads the cost over the asset's useful life, and that spreading is depreciation. There is more than one way to do it, so let us work the two main methods through the same asset and compare them.
What depreciation is
Depreciation is the systematic allocation of the cost of a non-current asset over the years it is used, matching the cost to the benefit the asset brings. It is a non-cash expense: no money leaves the business when you depreciate, you are simply recognising that the asset is being used up. Each year's charge goes to profit or loss, and the total charged so far, the accumulated depreciation, is deducted from the asset's cost to give its carrying amount on the statement of financial position.
The scenario
Meridian Removals buys a delivery van for £24,000. It expects to use the van for four years and then sell it for around £4,000, its residual value. We will depreciate the van two ways: the straight-line method and the reducing-balance method.
Method 1: straight-line
The straight-line method charges the same amount every year. You take the cost less the residual value and divide by the useful life:
(£24,000 − £4,000) ÷ 4 years = £5,000 a year.
After four years the carrying amount is £4,000, exactly the residual value, which is how straight-line is designed to work.
Method 2: reducing balance
The reducing-balance method charges a fixed percentage of the asset's carrying amount each year. Because the carrying amount falls each year, so does the charge, so more depreciation is recognised early and less later. Using a rate of 25% on the same van:
Notice the charge falls from £6,000 to around £2,531, and the carrying amount does not land neatly on the residual value, because reducing balance is driven by a percentage rate rather than by the residual figure.
Same asset, two patterns. Straight-line spreads the cost evenly, which suits assets that give steady use over their life, such as buildings or fixtures. Reducing balance front-loads the charge, which suits assets that lose value or usefulness fastest early on, such as vehicles and some equipment. The method should reflect how the asset is actually consumed.
Where this comes up in ACCA
Depreciation is core to Financial Accounting (FA), both as its own calculation and as an adjustment inside a larger set of statements. It returns in more depth in Financial Reporting (FR) under IAS 16, alongside revaluations and impairment. The two methods above are the foundation for all of it.
The best way to lock these in is to work them repeatedly. The free ACCA FA course on Clevernest teaches depreciation and the other adjustments inside a real business, with instant marking as you go.
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Frequently asked questions
What is depreciation?
Depreciation is the systematic spreading of the cost of a non-current asset over its useful life. It is a non-cash expense charged to profit or loss each year, and the total charged so far is deducted from the asset's cost to give its carrying amount.
What is the difference between straight-line and reducing-balance depreciation?
Straight-line charges the same amount every year, giving an even spread. Reducing balance charges a fixed percentage of the falling carrying amount, so the charge is higher in the early years and lower later. Both spread the cost, but in different patterns.
How do you calculate straight-line depreciation?
Take the cost less the residual value and divide by the useful life. In our example (£24,000 minus £4,000) divided by four years gives £5,000 of depreciation each year.
How do you calculate reducing-balance depreciation?
Apply a fixed percentage to the asset's carrying amount at the start of each year. In our example at 25%, the charges are £6,000, then £4,500, then £3,375, and so on, each based on the reduced carrying amount.
Where is depreciation tested in ACCA?
It is core to Financial Accounting (FA), and it returns in more depth in Financial Reporting (FR) under IAS 16, where it sits alongside revaluations and impairment of non-current assets.