# Depreciation – Reducing Balance Method

Last Updated
July 28, 2010

## The Reducing Balance Method

Note: This method will require the basic functions of a scientific calculator. Alternatively, if you are a wiz at using Microsoft Excel, calculations can be made using this software.

Slightly more complicated than the straight-line method, the reducing balance assumes that an asset loses more value during the earlier years of its life. Consequently, a depreciation rate (%) for reducing value is used, resulting in less value being lost each year.

Using the same example as before, a car is purchased at £16,000, with a residual value of £4,000 to be used for four years.

Now, there are two formulas that need to be considered here (nothing too extreme). Firstly, you need to work out the depreciation rate using the formula below. If you are unsure of the asset lifetime (in, say, years), then the following formula can be ignored. Instead, you would have to estimate a reasonable depreciation rate that compliments the particular asset. (where n is the expected lifetime in years)

## Therefore:

The depreciation can now be worked out as follows:

 Year Depreciation Net Book Value 0 0 £16,000 1 £4800 (£16,000 x 30%) £11,200 2 £3360 (£11,200 x 30%) £7840 3 £2352 (£7840 x 30%) £5488 4 £1646 (£5488 x 30%) £3842

The residual value of £3842 is not exactly the £4000 that was suggested. The calculations would have arrived at this figure in the fourth year if we used the exact depreciation rate instead of rounding up to a whole number, in this case – 30% and not 29.2893…%.