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Depreciation - Reducing Balance

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Depreciation - reducing balance example


In our introduction to the methods available to calculate depreciation, we suggested that there are two main methods that can be used:

- Straight- line depreciation

- Reducing balance method

We emphasised the point that these two methods simply provide an alternative way of allocating the total depreciation charge over several accounting periods. The total depreciation charge using either method will be the same over the total useful economic life of the asset.

To illustrate the reducing balance depreciation method, we have calculated the depreciation charge for the following asset:


A business purchases a new machine for £75,000 on 1 January 2003. It is estimated that the machine will have a residual value of £10,000 and a useful economic life of five years. The business decides to calculate annual depreciation at the rate of 40% of the written-down value. The business has an accounting year end of 31 December.

Reducing balance depreciation method

Using the straight line depreciation method, the calculation of the annual depreciation charge is as follows:

31 December  
  Original machine cost
20X3 Depreciation in 20X3 (40% cost)
  Written down value at 31 December 20X3
20X4 Depreciation in 20X4 (40% of WDV @ 31 December 20X3)
  Written down value at 31 December 20X4
20X5 Depreciation in 20X5 (40% of WDV @ 31 December 20X4)
  Written down value at 31 December 20X5
20X6 Depreciation in 20X6 (40% of WDV @ 31 December 20X5)
  Written down value at 31 December 20X6
20X7 Depreciation in 20X7 (40% of WDV @ 31 December 20X6)
  Written down value at 31 December 20X7

The reducing balance method can result in significant differences in the annual depreciation charge, depending on the "percentage" of written-down value that is used to calculate the charge.

In the example above, the total amount charged to depreciation in the first three years of owning the machine (20X3-20X5) was £58,800 (compared with £39,000 if a straight line depreciation method has been used).

To compare the reducing balance method with the "straight line" method, we have provided a worked example using the same data in the following revision note.


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Revision quizzes for business students

Starting a Business

Sources of Finance for a Startup
Cash Flow Forecasting for a Startup
Creating & Protecting Business Ideas
Startups and Understanding the Market
Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
Using Breakeven in Decision-Making


Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
Improving Cash Flow
Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios


Products & Brands
Place (Distribution)
Price Elasticity of Demand

Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
Sole Traders and Partnerships
Limited Companies
Generating and Protecting a Business Idea
Organisational Structures


Working in Teams
Communication Basics
Communication Methods
Workforce Planning
Recruitment, Selection & Training
Employee Motivation
Organisational Structures


Operational Objectives
Critical Path Analysis
Scale and Resource Mix
Lean Production
Capacity Management
Customer Service Basics
Managing Quality
Operational Decision-making
Using Technology in Operations
Working with Suppliers

Economic Environment

Economic Sectors
Government Spending & Taxation
Interest Rates & Monetary Policy

Business Strategy

Leadership styles
Business Culture
Change Management

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Introduction to Accounting
Users of Accounts
Accounting Concepts and Conventions
Stakeholder Theory
Characteristics of Accounting Information
Alternatives to Profit Maximisation
Maximising the Value of a Business
Non-financial Objectives of a Business
Comparison of Financial and Management Accounting

Financial objectives - intro
Financial objectives - key measures
Introduction to Business Planning
Introduction to Budgets
Purpose and Role of Budgets
Incremental Budgeting
Zero-based Budgeting
Variance analysis
Budgeting limitations

Introduction to Business Organisation
Forming a Company
Advantages of Incorporation

Introduction to Financial Management
Introduction to Working Capital
Working Capital Needs of Different Businesses
Working Capital Cycle

Managing Business Cash Flows - An Introduction
Introduction to Raising Business Finance
Sources of Finance for SMEs
Overdraft Financing
Business Angels
Introduction to Venture Capital
Sources of Equity Finance
Rights Issues
New Share Issues & Flotations
Intoduction to Leasing
Leasing - Advantages & Disadvantages

Introduction to Financial Accounting
Income Statement
Profit quality
Balance Sheet
Current assets
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Introduction to Ratio Analysis
Interpreting Financial Information
Accounts & financial performance
Asset turnover
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Debtor days
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Liquidity ratios
Gearing ratio
Shareholder ratios
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Depreciation - Straightline Method
Depreciation - Reducing Balance Method

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