Understanding Depreciation Methods
By Gregg Hopfeldt · 2025-04-12
What Is Depreciation?
Depreciation is the accounting process of spreading the cost of a fixed asset over its useful life. Instead of expensing the full cost in the year of purchase, you recognise a portion each year.
Straight-Line Method
The simplest approach. You take the cost of the asset, subtract any residual value, and divide by the useful life.
Example: A machine costs $10,000 with a 5-year useful life and no residual value. Annual depreciation = $2,000.
When to Use It
- Assets that provide equal benefit each year
- Buildings, furniture, and office equipment
- When simplicity matters more than precision
Reducing Balance Method
Also called the diminishing balance method. You apply a fixed percentage to the remaining book value each year. This front-loads the depreciation — more expense in early years, less later.
Example: A computer costs $5,000 with a 40% reducing balance rate.
| Year | Opening Value | Depreciation | Closing Value |
|---|---|---|---|
| 1 | $5,000 | $2,000 | $3,000 |
| 2 | $3,000 | $1,200 | $1,800 |
| 3 | $1,800 | $720 | $1,080 |
When to Use It
- Assets that lose value quickly in early years
- Technology and vehicles
- When tax regulations require it
How Simple Fixed Assets Handles It
You set the method and rate per category during setup. Every time you add an asset, we apply the correct calculation automatically — including pro-rata adjustments for assets purchased mid-year.
No formulas to maintain. No cells to check.
Once you've chosen a method, set this up in your register.