Reducing balance method
I almost forgot that I haven’t finish the depreciation calculation for the above method. How about I use the previous example for this method as we can see clearly the difference between them. Just wait….
A machine cost RM80,000 acquired in 2016. The depreciation is 20% per annum using reducing balance method.
As you can see, the calculation doesn’t change much. It just that, the similarities of between the straight line and reducing balance is that, they have same depreciation figure for the first year. This is because, the cost will be the base for the calculation. Therefore, both method same the same figure ONLY for the first year.
As for the second year, the reducing balance method, takes the balance figure (Net book value), using it as the base. By using the net book value each year as the base to calculate the yearly depreciation, the annual depreciation will continue to decrease. Therefore, the expenses to be reported in the SOCI will be smaller and smaller every year. And also, the profit looks good too.
It all depends on the company policy and also the advice from the auditor. Companies always use the normal practice according to the industry. Whenever they want to change the method of depreciation, they have to ask for and advise from the auditor and they better have such a strong reason on why they want to change method.
Try to compare between those two. What would be the net profit in year 5, given the gross profit of RM50,000. Answers? Tell me in class.