Reducing balance method also known as declining balance method is based on the assumption that assets are depreciated rapidly in the initial years of their use. In this method Depreciation is expressed as the (%)percentage of Cost for year 1 and in year 2 it is charged upon net book value of the asset.

Reducing balance depreciation Formula

Year 1: Cost of Asset X Depreciation Rate(%).

Year 2: Net Book Value X Depreciation Rate(%).

Where:

Cost of Asset: It includes Invoice price and all other Capital Expenditure incurred on the Asset.

Net Book Value: (Cost of Asset – Accumulated Depreciation)

Accumulated Depreciation: Sum of All previously charged depreciation.

Depreciation Rate: It is percentage(%) rate calculated by the formula below.

In the above formula:

n = Useful Life

Salvage value = Remaining value of the asset after all the depreciation.

Cost of Asset = It includes Invoice price and all other Capital Expenditure incurred on the Asset.

Example of R.B.M

Mr. A acquired an equipment for $9,000 and paid $1,000 for transportation. The asset is said to have 5 years of useful life and $500 residual value at the end of its life.