What does reducing balance depreciation assume about an asset?

Reducing balance depreciation operates on the principle that an asset is most efficient and generates greater economic benefits earlier in its life. This method recognizes that many assets lose value rapidly during the initial years of usage, as they often contribute more to production, revenue generation, or operational efficiency at the start of their life cycle. As such, the depreciation expense is calculated based on a fixed percentage of the asset's carrying amount (book value) each year, which means greater depreciation in the earlier years when the asset is assumed to be more productive.

This approach contrasts with methods that spread depreciation evenly over the asset's useful life, reflecting a belief that the asset's ability to contribute to revenue remains stable throughout. By using reducing balance depreciation, businesses acknowledge that the value and utility of the asset are not linear but rather decline more steeply in the beginning. Thus, it emphasizes the asset's higher revenue-generating potential upfront, aligning the expense recognition with the economic benefits derived from the asset.