How to calculate Reducing Balance Depreciation (formula and example)

Team Nomi

Aug 01, 2026
5 minutes read

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The reducing balance method of depreciation is an accounting method used to calculate the declining value of assets over time. Unlike the straight line method, which applies the same depreciation amount each year, the reducing balance method applies a fixed percentage to the asset’s remaining book value.

This results in higher depreciation charges in the early years and lower charges as the asset gets older. It is commonly used for assets such as vehicles, machinery, and technology equipment that lose value more quickly at the start of their useful life.

What is Reducing Balance Depreciation?

The reducing balance method calculates depreciation by applying a fixed percentage to the asset’s opening net book value each year.

Formula:

Depreciation = Net Book Value × Depreciation Rate

Example:

A £10,000 asset with a 20% depreciation rate:

• • Year 1: £10,000 × 20% = £2,000
  • Year 2: £8,000 × 20% = £1,600
  • Year 3: £6,400 × 20% = £1,280

The depreciation decreases each year because it is calculated on the remaining value of the asset.

What is depreciation?

Depreciation is the process of spreading the cost of a tangible asset over its useful life. It reflects the reduction in value caused by usage, age, wear and tear, or technological changes.

Businesses use depreciation to:

• • Prepare accurate financial statements
  • Calculate profits correctly
  • Record asset values on the balance sheet
  • Plan future investments

For example, instead of recording a £10,000 machine purchase as a full expense in one year, the cost is allocated across the years the machine is used.

Reducing balance vs. straight-line depreciation

Choosing the right depreciation method depends on how an asset loses value over time, with each approach affecting the timing and amount of depreciation recorded.

Both methods are acceptable accounting approaches when they accurately reflect how an asset provides economic benefits.

How to calculate Reducing Balance Depreciation

To calculate depreciation using the reducing balance method, you need:

• • Original asset cost: The purchase price of the asset
  • Depreciation rate: The percentage used each year
  • Residual value: Estimated value at the end of the asset’s useful life (if applicable)

Reducing Balance Depreciation formula

Depreciation = Net Book Value × Depreciation Rate

Where:

• • Net Book Value = Asset value at the start of the year
  • Depreciation Rate = Fixed annual percentage

If residual value is considered:

Depreciation = (Net Book Value − Residual Value) × Depreciation Rate

Reducing Balance Depreciation example

A company purchases a truck for £75,000 and applies a 20% depreciation rate.

As shown above, the depreciation expense reduces each year because it is calculated using the remaining asset value.

Advantages of the Reducing Balance Method

The reducing balance method can be useful because it:

• • Reflects real-world asset value decline
  • Matches higher costs with early asset usage
  • Provides higher depreciation deductions in early years
  • Works well for technology, vehicles, and machinery
  • Helps businesses plan asset replacement

Disadvantages of the Reducing Balance Method

However, it may not be suitable for every asset because:

• • Calculations are more complex than straight line depreciation
  • Early depreciation charges are higher
  • The asset value may not reach zero without adjustment
  • Incorrect rates can distort financial reporting

When should you use the Reducing Balance Method?

This method is suitable when:

• • Assets lose value quickly after purchase
  • Technology becomes outdated quickly
  • Vehicles or machinery have higher early usage
  • Maintenance costs increase as assets age

Businesses should choose a method that reflects the asset’s actual pattern of use and apply it consistently.

Common mistakes when calculating Reducing Balance Depreciation

Avoid these common errors:

• • Applying the depreciation rate to the original cost every year
  • Forgetting to update the asset’s book value
  • Using an unsuitable depreciation rate
  • Confusing accounting depreciation with tax allowances

How to choose a depreciation rate?

The depreciation rate depends on factors such as:

• • Expected useful life of the asset
  • Usage levels
  • Industry practices
  • Expected loss of value

Examples:

The correct rate should reflect the expected economic benefit of the asset.

Conclusion

The reducing balance method of depreciation helps businesses record asset values more accurately by applying depreciation to the remaining book value each year. It is particularly useful for assets that lose value quickly, such as vehicles, machinery, and technology equipment.

Businesses should remember that accounting depreciation is different from tax relief. Tax deductions are usually claimed through capital allowances, such as Annual Investment Allowance (AIA) and Writing Down Allowances.

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Frequently asked questions

1. How do you calculate reducing balance depreciation?
Ans. Reducing balance depreciation is calculated using:
Depreciation = Net Book Value × Depreciation Rate
The calculation is repeated each year using the asset’s remaining value.

2. What are the four methods of depreciation?
Ans. The four common depreciation methods are

• • Straight-line method
  • Reducing balance method
  • Units of production method
  • Sum of years’ digits method
    

3. Can a company use different depreciation methods?
Ans. Yes. A business can use different methods for different assets if each method accurately reflects how the asset is used and the approach is applied consistently.

4. What is another name for reducing balance depreciation?
Ans. The reducing balance method is also known as the declining balance or diminishing balance method.

5. Is reducing balance depreciation the same as reducing balance interest?
Ans. No. Reducing balance depreciation applies to assets, while reducing balance interest is used for loans where interest is calculated on the remaining loan balance.