A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.
A fixed asset has a cost of $12m,
to be depreciated on a reducing balance basis at a rate of 40% per year.
The depreciation charge for Year 1, in $m, would be:
= 12 x 40%
The net book value at the end of Year 1 (and the start of Year 2), in $m:
= 12 - 4.8
The depreciation charge for Year 2, in $m:
= 7.2 x 40%
The net book value at the end of Year 2 (and the start of Year 3), in $m:
= 7.2 - 2.88
And so on.
Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).
2. UK tax.
UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.