What is the Reducing Balance Method of Depreciation?

655
What is the Reducing Balance Method of Depreciation?

What is the Reducing Balance Method of Depreciation

When the reducing balance method of depreciation is used an asset is depreciated more at the start of its life compared to the end.

It is particularly applicable if you own an asset that loses significant value at the beginning of its life, such as a van or lorry.

How to Calculate the Reducing Balance Method of Depreciation

In the first year you depreciate the asset by a percentage of its cost but then in the following years the asset is depreciated at the same percentage but based on the remaining value rather than the cost.

An Example of Reducing Balance Method of Depreciation

You have purchased a company pickup truck for £44,000 and estimate it will lose 30% of its value in the first year. Depreciation for the first 5 years would be worked out as follows:

Year Value Depreciation (30%) Book Value Remaining
1  £44,000  £13,200  £30,800
2  £30,800  £9,240  £21,560
3  £21,560  £6,468  £15,092
4  £15,092  £4,528  £10,564
5  £10,564  £3,169  £7,395