Depreciation Reducing Balance
Depreciation reducing balance is one of the main methods for calculating depreciation in your accounts. The other main method used is straight line depreciation. Whichever method you choose to use for your fixed asset you need to use the same method for the whole period of the asset life.
Reducing balance method is used if an asset needs to be written off at a higher value during the early years. An example of this may be some machinery equipment, which as soon as purchased the value is reduced very quickly and then slows down over time.
Depreciation Reducing Balance Method Example
To calculate this method you need to choose a percentage rate of depreciation. For our example we have purchase a new piece of machinery at £20,000 using a 40% rate of depreciation. The asset is depreciated of a period of 5 years and has a residual value of £1500 at the end.
| Value start of year | Depreciation rate | Depreciation for year | Value of asset at y/e | ||
| Year 1 | £20,000 | 40% | £8,000 | £12,000 | |
| Year 2 | £12,000 | 40% | £4,800 | £7,200 | |
| Year 3 | £7,200 | 40% | £2,800 | £4,400 | |
| Year 4 | £4,400 | 40% | £1,760 | £2,640 | |
| Year 5 | £2,640 | 40% | £1,056 | £1,584 |
As you can see there is £1584 remaining at the end of the 5 year period. So to get this figure correct you will need to calculate the exact percentage that needs to be used.
Excel Template - Depreciation Reducing Balance
Within Business Accounting Basics we have two different calculators for working out your reducing balance figure. The first reducing balance calculator requires that you know the percentage rate of depreciation that is required and is calculated over a period of 5 years.
The second calculator uses a formula embedded in Microsoft excel. We have set up a simple spreadsheet that uses the formula to calculate the figures for you. This excel template only works if the is a residual value at the end of life up to a maximum period of 10 years.
Instructions for excel depreciation reducing balance spreadsheet
- Download the depreciation reducing balance excel template.
- Only enter figures in the GREEN boxes.
- Enter the purchase price of the equipment.
- Enter the residual balance - this is the estimated value of the asset at the end of its life.
- Enter the number of years you wish to depreciate the asset over.
- Enter the number of months the assets needs to be depreciated during the first year. E.g. If you purchased the asset in January and your year end is at the end of March, this figure will be 3 months. The template will automatically calculate the number of months in the last year for you.
Return from depreciation reducing balance to fixed asset page.