What Is Reducing Balance Depreciation?
How a percentage of the remaining book value is charged each year.
Home › Accounting Glossary › Reducing Balance Depreciation
| Also called | Declining balance method |
|---|---|
| Compare with | Straight-line |
| Topic | Financial accounting · Non-current assets |
Reducing balance depreciation in plain English
Many assets, such as vehicles and computers, lose most value early. This method matches that by charging more in the first years. Because each year’s charge is a percentage of a shrinking number, the book value never quite reaches zero on its own.
Worked example
An asset costs 10,000 and is depreciated at 20% a year on the reducing balance.
| Year | Opening book value | Depreciation (20%) | Closing book value |
|---|---|---|---|
| 1 | 10,000 | 2,000 | 8,000 |
| 2 | 8,000 | 1,600 | 6,400 |
| 3 | 6,400 | 1,280 | 5,120 |
The charge falls each year: 2,000, then 1,600, then 1,280. Try other rates on the free depreciation schedule template.
- Applying the rate to the original cost each year. It is applied to the opening book value.
- Subtracting residual value first. In the basic method the rate applies to the book value directly.
Frequently asked questions
When should reducing balance be used?
When an asset loses more value or is more useful in its early years, such as vehicles and technology.
Why is the charge higher in the early years?
Because the percentage is applied to the highest book value at the start, and the book value falls each year.
How does it compare with straight-line?
Straight-line charges the same amount each year. Reducing balance front-loads the charge, so profit is lower early and higher later.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.