Reducing Balance Method of Depreciation
Definition: Reducing Balance Method of Depreciation (also known as diminishing balance method or declining balance method) is calculated by charging a higher rate of depreciation in the early part of an asset's life. In this method, a fixed percentage is applied to the net book value of an asset to arrive at the annual depreciation.
Formula:
Depreciation charge = net book value x rate of depreciation
Example:
Cost of vehicle = $20,000
Estimated useful life = 4 years
Expected disposal value at the end of useful life = $1,250
Depreciation rate = 50%
Calculate the annual depreciation for the next four years.
Answer:
Depreciation (year 1) = $10,000
Depreciation (year 2) = (20000-10000)x50% = $5,000
Depreciation (year 3) = (20000-15000)x50% = $2,500
Depreciation (year 4) = (20000-17500)x50% = $1,250
Formula:
Depreciation charge = net book value x rate of depreciation
Example:
Cost of vehicle = $20,000
Estimated useful life = 4 years
Expected disposal value at the end of useful life = $1,250
Depreciation rate = 50%
Calculate the annual depreciation for the next four years.
Answer:
Depreciation (year 1) = $10,000
Depreciation (year 2) = (20000-10000)x50% = $5,000
Depreciation (year 3) = (20000-15000)x50% = $2,500
Depreciation (year 4) = (20000-17500)x50% = $1,250