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Under this method the depreciation charge will be higher in the earlier years of the life of the asset. Here needs a percentage to apply. And in the first year the percentage is applied to cost but in subsequent years it’s applied to the asset’s net book value (alternatively known as written down value).
The net book value (NBV) or written down value (WDV) of a non-current asset is its original cost less the accumulated depreciation on the asset to date.
The formula of reducing balance method is:
And there’re problems in using the formula:
- if there is no residual value, Dp becomes 100%
- if residual value is small relative to cost, Dp becomes a very high percentage.
For example, a trader purchased an item of plant for $1,000. The depreciation charge for each of the first five years is to be calculated, assuming the depreciation rate on the reducing balance to be 20% p.a.
Notice that this method results in higher depreciation charges in earlier years, and a much annual rate is required than for the straight line method if the asset is to be written off over the same period.
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Hi,
Can you please solve for me this practical problem? the problem provides that a Plant is purchased at a cost of 8000 USD, after 3 years of it’s working, the value of asset reduced to 4096 USD, if depreciation is charged under reducing balance method, what will be the rate of depreciation?
I shall be thankful if you provide me the solution.
Hi,
I’m honored to discuss this problem with you.
Firstly, we must reserach the formula of reducing balance method.
According your questions, here:
N = 3
R = 4096
C = 8000
So, the rate of reducing balance method is:
Dp = (1 – 0.8)*100% = 20%
Please note that this method results in higher depreciation charges in earlier years.
Good luck~!
I would like to thanks that the all accounting methods available at internet. thanks
You’re welcome. :)
I WOULD LIKE TO THANKS THAT ALL METHODS ARE AVAILABLE AT INTERNET.
REGARD
BURHAN ABBAS
It’s my pleasure~ hehe.
30 june 2009
Cost Value of Motor Vehicle is $14650.
The motor vehicle can be traded-in
For $7000 at the end of 4 years.
(Motor vehicle was acquired on 30
March 2009)
Find out the depreciation rate using the diminishing method.
Can you account it yourself? I think it’s not difficult according the formula.