How is depreciation calculated using the Reducing Balance method?

In the Reducing Balance method of calculating depreciation, the process involves applying a fixed percentage to the asset's carrying amount, which is the historical cost minus accumulated depreciation. This method reflects the fact that as an asset is used, it loses value not just based on its original cost, but based on its value at any given point in time after previous depreciation has been accounted for.

The formula effectively shows that depreciation is calculated on the decreasing book value of the asset, which is important because it aligns with the actual use and capacity of the asset over time. As the accumulated depreciation increases with each accounting period, the carrying amount—calculated as historical cost minus accumulated depreciation—decreases.

Therefore, choosing the calculation that uses the historical cost minus accumulated depreciation accurately reflects how the Reducing Balance method is designed to operate and is the correct approach to determining depreciation over time using this method.