Common Depreciation Methods
Let’s look at some simple methods used in accounting:
1. Straight-Line Method
This is the simplest and most common.
How it works:
Same amount is deducted every year over the asset’s useful life.
Example:
You buy office equipment for RM10,000 with a useful life of 5 years.
Annual Depreciation = RM10,000 ÷ 5 = RM2,000 per year
2. Reducing Balance Method (Declining Balance)
This method charges more depreciation in the earlier years and less in later years.
How it works:
A fixed percentage is applied to the asset’s net book value each year.
Example:
You buy machinery for RM20,000 and use a 20% depreciation rate:
- Year 1: RM20,000 × 20% = RM4,000
- Year 2: RM16,000 × 20% = RM3,200
- Year 3: RM12,800 × 20% = RM2,560
… and so on.
3. Units of Production Method
Depreciation is based on usage (e.g., machine hours or units produced).
Example:
A machine costing RM100,000 is expected to produce 100,000 units over its life. If it produces 10,000 units in a year, depreciation =
RM100,000 × (10,000 ÷ 100,000) = RM10,000
⚠️ In Malaysia, straight-line and reducing balance are more commonly used in small businesses.
Accounting Depreciation vs. LHDN Capital Allowance
In your business accounts, you record depreciation. But when it comes to tax filing, LHDN does not recognise depreciation as a deductible expense.
Instead, LHDN allows you to claim Capital Allowance, which works similarly but follows their rules.
What Is Capital Allowance?
Capital allowance is a tax deduction given for the wear and tear of business assets. It replaces depreciation when calculating your business’s taxable income.
Two Key Parts:
- Initial Allowance (IA)
- A one-time deduction in the first year of using the asset
- Usually a fixed percentage of the asset cost (e.g., 20%)
- Annual Allowance (AA)
- A deduction every year after that until the asset is fully written off
- Also based on a fixed percentage (e.g., 14% for general plant and machinery)
Example:
You buy a machine for RM50,000.
- Initial Allowance (20%): RM10,000
- Annual Allowance (14%): RM7,000 per year (on balance of RM40,000)
This continues until the full value is claimed.
Key Differences at a Glance
|
Accounting Depreciation |
LHDN Capital Allowance | |
|---|---|---|
|
Purpose |
Reflect asset usage in accounts |
Claim tax deduction |
|
Method |
Follows standard accounting methods |
Fixed by LHDN |
|
Flexibility |
Yes |
No, must follow LHDN guidelines |
|
Shown in P&L |
Yes |
No, it is adjusted during tax computation |
|
Deductible in tax |
No |
Yes |
In summary
While depreciation helps you manage your business records, only capital allowance matters when it comes to reducing your tax bill. Knowing both is important—one for managing your finances, the other for staying compliant with LHDN
LHDN Resources
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