How to calculate depreciation rate in reducing balance method?
Answers
At first calculate depreciation like straight line method for first year. After calculate depreciation for first year you will have a closing value of your assets. Now you have to calculate depreciation on previous year's closing value.
Ex. ABC co. purchased a machinery worth rs 20,000. Calculate depreciation under 10% of reducing balance method for 3 years.
1st year ,
depreciation : 20,000×10% = 2,000
closing value = 20,000-2,000= 18,000
2nd year ,
depreciation : 18,000×10% = 1,800
closing value = 18,000-1,800= 16,200
3rd year ,
depreciation : 16,200×10% = 1,620
closing value = 16,200-1,620= 14,580
Explanation:
The calculation of correct rate of depreciation is very important under this method. Following formula should be applied under given conditions:
When the cost of asset, residual value and useful life of an asset is given:
r = 1 - (S/C)1/n
Where: (Formula)
r = Rate of depreciation
n = Estimated useful life of asset
S = Residual value after the expiry of useful life
C = Original cost of asset.