Reducing Balance Method

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Reducing Balance Method or Diminishing Balance Method or Written Down Value Method of Depreciation:

Reducing balance method is also named as diminishing balance or written down value method. under this method, depreciation of one year is based on the previous year’s net book value i.e., (what the asset is worth in the firms’s account). The net book value of a non-current asset is calculated as follows:

Formula for Calculating Net Book Value of a Non-Current Asset:

The formula is given below:

net book value formula

As the depreciation charged against an asset builds up over time, the net book value of an asset would decrease after each year of asset’s life. Therefore, although the percentage used in this method remains constant, the depreciation charge (in $) will become smaller, the longer we have the asset.

This process of using previous year’s net book value for calculating depreciation continues until its scrap value is being reached. However, the book value of an asset cannot be lower than its scrap value.

Formula for Calculating Depreciation under Reducing Balance Method:

The formula for calculating depreciation under reducing balance method is given below:

reducing balance method formula

Solved Example:

A car was bought for $10000 an has scrap value of $2000 at end of its estimate life of four years.

Required:

Calculate annual depreciation charge under reducing balance method:

Solution:

Annual depreciation rate under reducing balance method may be calculated as:

reducing balance method example