Reducing-balance depreciation
Reducing balance depreciation applies a constant percentage to the asset’s opening carrying amount, normally producing larger charges early and smaller charges later. It can suit assets whose benefits are consumed more rapidly in earlier years. The amount must not be depreciated below its residual value, and part-year charges follow the facts and policy stated in the question.
Worked example
An asset costs $10,000 and is depreciated at 20% reducing balance: year one is $2,000; year two is 20% of $8,000, or $1,600.
Common mistake
Do not apply the percentage to original cost every year: that would produce a constant charge rather than reducing balance.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | F1 | Direct | July 2027–August 2028 |
| ACCA | F2 | Supporting | July 2027–August 2028 |
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| CIMA | F1 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
Related terms
Also called: Reducing balance method, Diminishing balance method, Depreciation reducing balance method