Reducing balance depreciation is a common method of depreciation, known more commonly as declining balance depreciation. This depreciation method is an accelerated depreciation method. Accelerated depreciation takes more depreciation expense in the beginning of the asset's useful life and each year depreciates the asset less and less. It is important to know how to perform this calculation, because depreciation is a basic concept in the generally accepted accounting principles. Other common depreciation methods include straight line and sum of year's digits.
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Estimate the useful life of the asset. Make this estimate based on past dealing with similar assets or any other information you can find on the asset. Find the cost you paid for the asset. Determine the speed of depreciation you want to use. For example, a company buys a £13,000 car that it plans to use for four years. The company chooses a 1.5 depreciation rate.
Divide the depreciation speed by the asset's useful life. In the example, 1.5 divided by four equals 0.375. This is the yearly depreciation rate.
Multiply the current value of the asset by the yearly depreciation rate. The current value of the asset equals the cost of the asset minus any accumulated depreciation. For the first year, the current value is the cost of the asset. In the example, £13,000 times 0.375 equals £4,875. This is the first year's depreciation.
Subtract the year's depreciation from the current value to calculate the new current value to use in the next year. In the example, £13,000 minus £4,875 equals £8,125. For next year, you would use this value as the current value in Step 3 and repeat steps 3 and 4 as many times as necessary..
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