Reducing depreciation You can use this method to depreciate an asset by a fixed percentage each year based on the book value. The book value never reaches zero. You can write off the asset at a certain value or after a set period of time. This is sometimes referred to as the scrap value. For example, an asset worth £/€10,000.00 depreciates at the rate of 25% a year. This is the annual depreciation calculation:
| | Current book value £/€ | Annual depreciation rate
% | Annual depreciation amount
£/€ | New book value
£/€ | | Year 1 | 10,000 | 25 | 2,500.00 | 7,500.00 | | Year 2 | 7,500 | 25 | 1,875.00 | 5,625.00 | | Year 3 | 5,625 | 25 | 1,406.00 | 4,219.00 | | Year 4 | 4,219 | 25 | 1,055.00 | 3,164.00 |
The Reducing method takes longer than the Straight method to depreciate an asset, even using the same annual depreciation rate. In our example above, the Reducing method leaves a book value of £/€3,164.00 but the Straight method writes off the asset to zero.
The Fixed Assets Register calculates Reducing depreciation on a monthly basis using the following calculation:
| Formula | Monthly depreciation = (Current book value) x (1 - (1 - Annual depreciation rate / 100) 1/12) | | Excel formula | =Current book value*(1-(POWER((1-(Annual depreciation rate/100)),1/12))) | These are the formulas for the most commonly used depreciation rates:
| Depreciation rate | Equation | | 5% | Monthly depreciation = Current book value x 0.004265319 | | 7.5% | Monthly depreciation = Current book value x 0.006475737 | | 10% | Monthly depreciation = Current book value x 0.008741611 | | 12.5% | Monthly depreciation = Current book value x 0.011065933 | | 15% | Monthly depreciation = Current book value x 0.013451947 | | 20% | Monthly depreciation = Current book value x 0.01842347 | | 25% | Monthly depreciation = Current book value x 0.023688424 | | 33% | Monthly depreciation = Current book value x 0.032822391 | Example
| Cost Price | £/€10,000.00 | | Method | Reducing | | Annual depreciation rate | 25% |
▼ Manually calculate the depreciation - Calculate the depreciation rate as a decimal value, in this example, this is 25/100 = 0.25
- 1 - 0.25 = 0.75
- 0.75 to the power of 1/12 = 0.976311575
Calculate this on a scientific calculator by entering 0.75, then press xy , then enter (1 / 12) and press =
- 1 - 0.976311575 = 0.023688425
- Current Value of Asset x 0.023688425 = £/€236.88
Therefore, the depreciation for the asset in Month 1 is £/€236.88
Using the same formula, the following month's depreciation is:
Current Value of Asset (10,000 – Month 1 depreciation) x 0.023688425
That is, 9,763.12 x 0.023688425 = £/€231.27
 NOTE: Once you calculate the value in step 4, it's the same every month. Therefore you multiply the current book value by the calculated value.
| | Year 1 | | Month | Book Value | Monthly Depreciation | | 1 | 9763.12 | 236.88 | | 2 | 9531.84 | 231.27 | | 3 | 9306.05 | 225.79 | | 4 | 9085.60 | 220.45 | | 5 | 8870.38 | 215.22 | | 6 | 8660.25 | 210.13 | | 7 | 8455.11 | 205.15 | | 8 | 8254.82 | 200.29 | | 9 | 8059.27 | 195.54 | | 10 | 7868.36 | 190.91 | | 11 | 7681.97 | 186.39 | | 12 | 7500.00 | 181.97 | | Annual Total: | - | 2500.00 |
▼ Write off the book value Use journals to reduce the book value to zero and increase the depreciation expense. For example, if the vehicle was bought at £/€10,000 and the current book value after depreciation is £/€7500.00, the posting is: | N/C | Name | T/C | Debit | Credit | | 0051 | Motor Vehicles Depreciation | T9 | | 7,500.00 | | 8003 | Motor Vehicle Depreciation | T9 | 7,500.00 | |
Next steps You can now post your depreciation either manually or automatically, when you run your month end process.
Upgrade your licence
Growing business? Add more companies, users, or employees to your licence with ease. Leave your details and we’ll be in touch.
|
