What is the Reducing Balance Depreciation?
Definition: Reducing Balance Depreciation is calculated by charging a higher rate in the early part of the assets life.
This method is considered for any asset that has a high usage in the early part of their life. An example of how this is calculated is show below. The amount of depreciation reduces as the life of the asset progresses.
- An asset has a useful life of 3 years
- Cost of the asset was £4,000
- Residual or Scrap Value is £300
- Rate of depreciation is 50%
Depreciation to be expensed for the three years will be:
NBV R.V Rate Depreciation Accumalated Depreciation Year1: (4,000 - 300) x 50% = 1,850 1,850 Year2: (2,150 - 300) x 50% = 925 2,775 Year3: (1,225 - 300) x 50% = 925* 3,700
*When using the reducing balance method, the depreciation for the last year of the asset's useful life is the difference between net book value at the start of the period and the estimated residual value. This is to ensure that depreciation is fully charged.