Reducing Balance Depreciation

Why use another method?

Some assets may have low repair costs in the early years but this may increase as the asset ages.  As a result it may be better to have higher depreciation when repair costs are low and then have lower depreciation costs as repair bills rise.  The reducing balance method attempts to emulate this.

How to calculate it

Cost – Accumulated Depreciation (at start of year) = Net Book Value (NBV)

Reducing Balance method is simply x% of NBV

•          Watch out for the use of 33 1/3% - simply divide the NBV by 3 !!

•          In the first year depreciation figures are the same for both Straight Lines and Reducing Balance methods!

If an non-current asset (machinery) cost £10,000 and was to be depreciated by 20% then the first years depreciation charged to the Income Statement is £2000 (20% of 10000).  In the second year we need to depreciate 20% of £8000.  Don’t forget that NBV is cost minus accumulated depreciation so its £10000 - £2000.

In the second the depreciation charged to the income statement is £1600.  In the balance sheet we would have

Balance sheet (extract)

Non-Current Assets

Machinery at cost                            £10000

Less provision for depreciation         £ 3600

Net Book Value                                                £6400

Next year’s depreciation would be 20% of £6400 (£1280).  Each year the amount of depreciation charged as an expense will be smaller than the last until it is disposed of.