What is reducing balance depreciation?

What reducing balance depreciation means

Instead of an equal charge each year, the reducing balance method applies the same percentage to the asset's net book value at the start of each year:

Annual depreciation = net book value at start of year × depreciation rate

Because the book value falls each year, so does the charge. The asset never quite reaches zero, so any small remaining value is written off when it is sold or scrapped. This method suits assets that lose most of their value early, such as cars, computers and phones.

Example

A recruitment firm buys laptops costing £10,000 and depreciates them at 30% reducing balance.

By the end of year four the laptops are shown at £2,401, close to what they might fetch second-hand.

Finding the right rate

If you know the cost, the expected residual value and the useful life, you can work out the matching rate. In practice most small businesses use round figures: 25% for vehicles and 33% for computer equipment are common choices. The aim is a book value that is roughly in line with what the asset would fetch if sold.

Why it matters for your business

Choosing the method that matches how an asset loses value gives a truer profit figure and a realistic balance sheet. Once chosen, use it consistently and change only if another method gives a fairer picture.

For tax, capital allowances on assets in the main and special rate pools are also given on a reducing balance basis, through annual writing down allowances. In practice, most small business equipment gets 100% relief in year one under the Annual Investment Allowance, whatever depreciation method the accounts use. Cloudkeepers picks depreciation rates that suit each client's assets.

Reducing balance vs straight-line