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. [BCB:19:UK - Sales message :ECB] |