The balance of 40,062 shown above is referred to as the carrying amount (sometimes

also known as the written-down value or net book value) of the asset. It represe
nts that
portion of the cost (or fair value) of the asset that has still to be charged as
an expense
(written off ) in future years. It must be emphasised that this figure does not,
unless by
coincidence, represent the current market value, which may be quite different. T
he only
point at which the carrying amount is intended to equal the market value of the
asset is
immediately before it is to be disposed of. Thus in Example 3.7, at the end of t
he four-year
life of the machine, the carrying amount would be 2,000
its estimated disposal value
.
The straight-line method derives its name from the fact that the carrying amount
of the asset at the end of each year, w
he second approach found in practice to calculating depreciation for a period is
referred to as the reducing-balance method. This method applies a fixed percenta
ge
rate of depreciation to the carrying amount of the asset each year. The effect o
f this
will be high annual depreciation charges in the early years and lower charges in
the
later years. To illustrate this method, let us take the same information that wa
s used
in Example 3.7. By using a fixed percentage of 60 per cent of the carrying amoun
t
to determine the annual depreciation ch