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Reducing balance depreciation
05-15-2006, 12:00 AM,
#1
Reducing balance depreciation
Hi, straight line is easy
Car - £10,000 depreciated over 4 years to zero = £2,500 per month and it's gone

However how would I do the same calcualtion on reducing deprecation?

I need to come out at zero over 4 years but I come to £3164

My calc here is

£10,000
Less 25% = £7,500
£7,500
Less 25% = £5625
£5625
Less 25% = £4219
£4219
Less 25% = £3164 ! and not zero

Obviously I am missing the basics here however please tell me where I am going wrong!

Many thanks
Fleety
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05-15-2006, 03:02 AM,
#2
 
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Fleety</i>
<br />Hi, straight line is easy
Car - £10,000 depreciated over 4 years to zero = £2,500 per month and it's gone

However how would I do the same calcualtion on reducing deprecation?

I need to come out at zero over 4 years but I come to £3164

My calc here is

£10,000
Less 25% = £7,500
£7,500
Less 25% = £5625
£5625
Less 25% = £4219
£4219
Less 25% = £3164 ! and not zero

Obviously I am missing the basics here however please tell me where I am going wrong!

Many thanks
Fleety
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

It is not necessary to bring your asset’s vale down to Zero when calculating depreciation unless your asset has scrap value ZERO at the end of its usage in your company/organisation. Anyway I don’t think that you can bring your asset down to zero by using reducing method of depreciation (on NBV). Taking your example above, if you are willing to spread your cost of asset into its useful life then it isn’t appropriate to use same % of Depreciation charge as straight line method. You can charge higher % of depreciation (ie. 35%) and whatever is left at the end of year 4 that would be its NBV and when you will dispose it you can treat the asset same as you treat it in when you make profit/loss on disposal of asset.

There is another reducing balance method of depreciation exit in which you can bring your asset’s vale down to zero But I don’t want to mention that method here because you may get confused.
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05-19-2006, 03:35 AM,
#3
 
hi dear Sajjad,plz explain the other one for me!
regards
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05-19-2006, 07:23 AM,
#4
 
For certain fixed assets, the benefits derived may be high in the early years, but may decline as the asset ages. For such assets, the reducing-balance method of depreciation would be appropriate insofar as it matches the depreciation expense with the pattern of benefits.
Once a particular method of depreciation has been chosen for a fixed asset, the method should be applied consistently over its life. It is only permissible to switch from one method to another if the new method provides a fairer presentation of the financial results and financial position.
At the moment in the method of reducing-balance depreciation you are only allowed to chare depreciation on NBV therefore your asset can’t reach the value of ZERO. But if you charge depreciation in a measurable way then your asset value can reach to zero this method is similar to depreciation but have a different name.
Depletion is a similar to depreciation but applied to assets that are used up in a measurable way. The most important examples of this are oil reserves and mines.
The value of an oil reserve is reduced, not by the passage of time, but by the extraction of oil. Therefore the cost charged in the accounts each year is proportionate to the amount of oil extracted during that year. Depletion would be calculated in a similar way for other assets, the calculation basically being
(amount used in this period ÷ total amount available when asset was bought) × (cost of asset - estimated value of asset after full depletion)

now plz dont say it is not a depreciation
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05-19-2006, 06:32 PM,
#5
 
Hi dear. okay .I would nt say it But u had confused me in ur previouse post by simply saying tht there is another reducing balance method of depreciation,therefore i did nt got the idea that u r talking about Depletion.....
Thax for the reply
[)] <blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by sajjad_dar2000</i>
<br />For certain fixed assets, the benefits derived may be high in the early years, but may decline as the asset ages. For such assets, the reducing-balance method of depreciation would be appropriate insofar as it matches the depreciation expense with the pattern of benefits.
Once a particular method of depreciation has been chosen for a fixed asset, the method should be applied consistently over its life. It is only permissible to switch from one method to another if the new method provides a fairer presentation of the financial results and financial position.
At the moment in the method of reducing-balance depreciation you are only allowed to chare depreciation on NBV therefore your asset can’t reach the value of ZERO. But if you charge depreciation in a measurable way then your asset value can reach to zero this method is similar to depreciation but have a different name.
Depletion is a similar to depreciation but applied to assets that are used up in a measurable way. The most important examples of this are oil reserves and mines.
The value of an oil reserve is reduced, not by the passage of time, but by the extraction of oil. Therefore the cost charged in the accounts each year is proportionate to the amount of oil extracted during that year. Depletion would be calculated in a similar way for other assets, the calculation basically being
(amount used in this period ÷ total amount available when asset was bought) × (cost of asset - estimated value of asset after full depletion)

now plz dont say it is not a depreciation
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
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05-21-2006, 02:08 AM,
#6
 
@Fleety
Well i think ur basics are quite wrong.
Firt of all look at the definition of depreciation. its the systematic allocation of depreciable amount over the useful life of asset.
so its not the written down value, but the depreciable amount that should be zero at the end of the useful life of the asset.
u r trying to make written down value = 0 which is incorrect.
The depreciable amount will always be 0 irrespective of the method of depreciation used.
and depreciable amount = Cost of asset-residual value
u r welcome to ask any clarifications
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