Definition Of Reducing Balance Method

The reducing balance method takes off a percentage of the value of a non current asset each year.

Definition of reducing balance method. Nouna method of depreciating assets where the asset is depreciated at a constant percentage of its cost each year also calleddeclining balance method. However unlike fixed installment method the rate percent is not calculated on cost of asset but. The amount of depreciation goes on decreasing while the expenses on repairs goes on increasing so that the total charge against revenue over different years remains more or less the same. The declining balance method also known as the reducing balance method is ideal for assets that quickly lose their values or inevitably become obsolete.

The reducing balance method of depreciation reflects this more accurately than other depreciation methods. In this way the amount of depreciation each year is less than the amount provided for in the previous year. For example a an asset that is valued at 50 000 and depreciated at a rate of 10 per year will be depreciated by 5 000 in year one leaving a net book value of 45 000 in the balance sheet. Reducing balance method equalizes the yearly burden on profit and loss account in respect of both depreciation and repairs.

Declining balance method. Declining balance method. Under reducing balance method the amount of depreciation is calculated by applying a fixed percentage on the book value of the asset each year. Nonetheless the straight.

On the other hand straight line depreciation results in equal depreciation expenses and therefore cannot account for higher levels of productivity and functionality at the beginning of an asset s useful life. Reducing balance method also known as declining balance depreciation or diminishing balance depreciation the depreciation is charged at a fixed rate like straight line method also known as fixed installment method or straight line depreciation. Under reducing balance method the depreciation is charged at a fixed rate like straight line method also known as fixed installment method but the rate percent is not calculated on cost of asset as is done under fixed installment method it is calculated on the book value of asset. Reducing balance method meaning.