Reducing Balance Method
This method assumes that the annual depreciation charge is based on the of the fixed asset value at the
beginning of the year under review. The method is also referred to as the diminishing balance method.
23.1 /25.1
D. Jones, a manufacturer purchases a drilling machine for the sum of $4000. It has an estimated life of
five years.
You are required to calculate the annual depreciation expense for the operative life of the asset using
the reducing balance method. (Assume that 40% per annum is to be used as the rate of annual
depreciation.
Depreciation Accumulated Net Book
Year Cost Expense Depreciation Value
1 4,000 1600 1600 2400
2 4000 960 2560 1440
3 4000 576 3136 864
4 4000 346 3482 518
5 4000 207 3689 311
NB***** Workings for Depreciation Expense
Year 1: 4,000 x 40/100 = 1,600
Year 2: 2,400 x 40/100 = 960
Year 3: 1440 x 40/100 = 576
Year 4: 864 x 40/100 = 346
Year 5: 518 x 40/100 = 207
Provision for Depreciation A/c
Year 1 Year 1
Dec 31 Bal c/d 1,600 Dec 31 Profit and Loss 1,600
1,600 1,600
Year 2 Year 2
Jan 1 Bal b/d 1,600
Dec 31 Bal c/d 2,560 Dec 31 Profit and Loss 960
2,560 2,560
Year 3 Year 3
Jan 1 Bal b/d 2,560
Dec 31 Bal c/d 3,136 Dec 31 Profit and Loss 576
3,136 3,136
Year 4 Year 4
Jan 1 Bal b/d 3,136
Dec 31 Bal c/d 3,482 Dec 31 Profit and Loss 346
3482 3,482
Year 5 Year 5
Jan 1 Bal b/d 3,482
Dec 31 Bal c/d 3,689 Dec 31 Profit and Loss 207
3,689 3,689
Year 6
Jan 1 Bal b/d 3,689
Profit and Loss Extract
Year 1: Provision for Depreciation 1,600
Year 2: Provision for Depreciation 960
Year 3: Provision for Depreciation 576
Year 4: Provision for Depreciation 346
Year 5: Provision for Depreciation 207
