Depreciation Reducing Balance Method

What is Reducing Balance Depreciation?

Depreciation reducing balance method or Declining Balance is one of the main ways for calculating depreciation in your accounts. The other main method used is straight-line depreciation. Whichever method you choose to use for the fixed asset you need to use the same method for the whole period of the asset life.

Depreciation 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. Another example is a new car, which will lose more value in the first few years.

Depreciation is used to reduce the value of the asset either monthly or annual and add a depreciation expense to the profit and loss account. It means that the value of the assets is written off over a period of time.

Reducing Balance Method vs Straight Line

The image uses the data from the example on this page and shows the difference between reducing balance and straight-line depreciation.

Reducing balance vs straight line depreciation

As you can see both methods start at 20,000 and finish as 1,500, but the rate they reduce is different. It is much faster to start using the declining balance method.

Depreciation Reducing Balance Method Example

To calculate this method you need to choose a percentage rate of depreciation. For our example, we have purchased 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.

There is a formula to calculate the reducing balance method, which is as follows: DB is declining balance

Formula for reducing balance method depreciation

You do not need to know the equation as our template will complete the work for you.

Excel Template – Depreciation Reducing Balance Method

Depreciation Reducing Balance Method

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.

Once the figures are calculated they can be used to enter the depreciation into the accounts. Each year a journal will be entered to adjust the depreciation. The journal will Debit depreciation expense in the profit and loss and credit accumulated depreciation in the balance sheet.

If you use an accounting package like Xero all the assets, it allows you to post all the assets and choose the depreciation method used. If you have a lot of assets it can save time.

Return from depreciation reducing balance method to fixed asset page.