Reducing balance depreciation
Also called: Reducing balance method
What is reducing balance depreciation?
The reducing balance method charges a fixed percentage of the carrying amount at the start of each year.
As the carrying amount falls, so does the charge.
Residual value is not taken off first.
Example
A van costs £8,000.00 and is depreciated at 25 per cent a year, reducing balance. The first year's charge is £2,000.00, which leaves a carrying amount of £6,000.00. The second year's charge is £1,500.00.
Why it matters
It puts more of the cost into the early years. It suits assets that lose most of their value when they are new, such as vehicles.
Practise it
Module, 5 rooms, PremiumDepreciation
See the first roomHow to work out reducing balance depreciation
Ledger Drill is practice, not tax or accounting advice. If this looks wrong, tell us at [email protected].