1. Reducing Balance Method
This method assumes that more value is lost at the start of the life of an asset, than at the end
We use a fixed percentage – e.g. 20%
We assume that the asset loses this percentage of its start of year value in depreciation

2. Reducing Balance Method – An Example
An asset was bought for £10,000. We will use it for 3 years. We will depreciate it 20% each year using the reducing balance method.
Year 1 – Start value = £10,000
It depreciates by 20%
= 20% of £10,000 = £2,000
It is now worth £8,000
Year 2 – Start Value = £8,000
= 20% of £8,000 = £1,600
It is now worth £6,400
Year 3 - Start Value = £6,400
= 20% of £6,400 = £1,280
It is now worth £5,120

3. Depreciation and Profit
Because depreciation is looking at the loss of the value of an asset, it reduces profit
We treat depreciation as an expense when calculating profit
So if an asset depreciates by £1,000 – we have an extra £1000 costs that year….
….and profit will be reduced by £1,000

4. Differences in Methods
Depending on which method you use, you could end up with very different figures for depreciation
If depreciation is high, expenses will be high, and therefore profits will be low
If depreciation is low, expenses will be lower, hence profits will appear high
That’s why the accountant in a business must choose an appropriate method of deprecation depending on the type of asset, how its used, what its used for, etc, etc
As you could imagine, depreciation is very much guess work, and some businesses have been found out trying to mislead people by recording very high or low depreciation figures