One method of fixed asset management is called the reduced balance method. In a straight line depreciation calculation, the rate of depreciation remains constant. In a reduced balance calculation, the rate of depreciation is high in the beginning and gradually decreases.
Understandably, this is not the most common form of fixed asset management, but it may be beneficial for certain types of assets. Understand that it is possible to have different fixed assets with different methods of depreciation. This is a reason to go with a software program which will help you calculate the differences between a straight line or reduced balance calculation for every asset.
The Reduced Balance Method
In some assets, there may be more benefits upfront which decline with time. Dont confuse the benefits from an asset with the value of an asset itself. In a straight line calculation, the value is determined via cost, value after termination, and the length of the term. A reduced balance calculation goes by the sticker price of the item, so the value is different year by year, when the blue book value changes.
Keep in mind that not all assets will be profitable using a reduced balance calculation. In fact, much of the time it can make little sense at all. Also, once a method is decided upon, it is necessary to stick with the same system. Usually it is not possible to switch to a different system, so make sure up front that the system you use is beneficial.
