name and describe the straight-line, reducing balance and revaluation methods of depreciation

4.2 Accounting for Depreciation and Disposal of Non‑Current Assets

Straight‑Line Method

Think of a bicycle you buy for £200. You plan to ride it for 5 years and expect it to be worth £20 at the end. The yearly depreciation is calculated as:

$D = \dfrac{C - S}{n}$ where C = cost (£200), S = salvage value (£20), n = useful life (5 years).

Plugging in the numbers:

$D = \dfrac{200 - 20}{5} = £36$ per year.

• Easy to calculate and explain.
• Assumes the asset loses value evenly each year.
• Used when the asset’s usage pattern is stable.

Reducing Balance Method

Imagine a laptop costing £1,000. The company decides to depreciate it at a rate of 25% each year based on the book value at the start of the year.

$D_t = r \times B_{t-1}$ where r = depreciation rate (0.25), B_{t-1} = book value at the beginning of year t.

Yearly depreciation:

• Depreciation is higher in the early years.
• Reflects higher wear‑and‑tear when the asset is new.
• Useful for assets that lose value quickly.

Revaluation Method

Picture a company owning a factory building. After a market boom, the building’s fair value rises from £500,000 to £650,000. The company can revalue the asset to the new fair value, then depreciate the *difference* over the remaining useful life.

New depreciation: $D = \dfrac{(F - B_{\text{old}})}{n_{\text{remaining}}}$ where F = new fair value, B_old = book value before revaluation, n_remaining = remaining useful life.

• Shows the true value of the asset on the balance sheet.
• Requires a professional valuation.
• Can lead to a higher depreciation expense after revaluation.