Examples of system reducing balance depreciation calculations

For accounting purposes depreciation represents the extent to which the economic value of an asset to the organisation has been consumed by the organisation. Reducing balance depreciation in each year is calculated as a percentage of the un-depreciated value (net value of the asset). So for an asset with a purchase cost of £1000 depreciated at a reducing rate of 30%, the first year depreciation is £300 (30% of £1,000), the second year depreciation is £210 (30% of net value at that time which is the £1,000 cost less £300 depreciation to date i.e. 30% of £700) and so on. The reducing balance rule is commonly used where the value of an asset falls more quickly in the early years than the latter years of its useful economic life. Cars and Personal computers probably follow this pattern.

How the system calculates reducing balance depreciation

The system computes a net book value (Cost or Valuation less cumulative depreciation less any Estimated Residual Value entered on the asset record) at the date of a depreciation posting or report and compares to the net book value at the start of the period. The difference adjusting for any additions, revaluations etc. is the depreciation for the period.

NOTE - If you have entered a residual value for the asset on the asset record then this value is deducted from the NBV in the calculation of depreciation

For those interested, the annual reducing balance rate set on the asset is used to determine a daily rate using compound interest theory over 365 days per year. So that to compute the net book value (NBV) on a particular date the calculation is: -

New NBV = Previous NBV * (1 - annual rate TO THE POWER OF (number of days of depreciation/365)

Examples

• Opening balance asset
• New asset
• Revaluation of an asset
• Impairment of an asset
• Additions to an existing asset

Opening balance asset

The NBV value above at 31 Oct 2020 is calculated as (4,200 x (1-0.3)^POWER(305/365)) and cumulative depreciation is (6,000 less 3,117.53) 2,882.47.

New asset

The NBV value above at 31 Dec 2020 is calculated as (10,000 x (1-0.25)^(120/365)) and cumulative depreciation is (10,000 less 9,097.55) 902.45

Revaluation of an asset

The NBV value above at 31 Dec 2020 is calculated as (5,000 x (1-0.30)^(92/365)) and cumulative depreciation is (7,786.59 less 4,507.11) 3,279.48

Impairment of an asset

The NBV value above at 31 Dec 2020 is calculated as (5,000 x (1-0.25)^(91/365)) and cumulative depreciation is (10,000.00 less 4.653.94) 5,346.06

Additions to an existing asset

An addition to an existing asset can be added by using a journal referenced to the relevant asset. Debit the appropriate tangible fixed asset cost account and the credit to asset additions account. Note the payment is also recorded to the asset additions account to balance to zero.

The system calculates a NBV, and therefore depreciation, for each addition starting in the month in which it was added.

Related Topics

• Straight Line Depreciation