How Xero calculates reducing balance depreciation
Reducing balance depreciation reduces the book value of an asset at a higher rate in the earlier years it is owned. Xero calculates annual depreciation by multiplying the depreciable value of the asset, less previous depreciation, by the depreciation rate. Xero calculates monthly depreciation using the full month, or actual days averaging method.
The depreciable value of an asset is one of the following:
- Purchase price
- Cost limit
- Purchase price less residual value
- Cost limit less residual value
For example, if the purchase price is 1500, and the residual value is 200, the depreciable value of the asset is 1300 (1500 - 200 = 1300).
Full month averaging method
If you choose this method, Xero divides annual depreciation by 12 to calculate monthly depreciation. It doesn't take into consideration the number of days in a month, or if your organisation only used the asset for part of a month.
For example: if the annual depreciation is 260, the monthly depreciation is 21.67 (260 ÷ 12 = 21.67).
Actual days averaging method
If you choose this method, Xero divides annual depreciation by the number of days in the month to calculate monthly depreciation.
- If you own an asset for a whole month, the calculation is annual depreciation ÷ 365 x number of days in the month.
- If you add or dispose of an asset part way through the month, the calculation is annual depreciation ÷ 365 x number of days your organisation used the asset.
For example: If you own an asset for 14 days of a month, and the annual depreciation is 260, the depreciation for that month is 9.94 (260 ÷ 365 = 0.71), (0.71 x 14 =9.94).
Xero will use the depreciation type you select to calculate the depreciation rate. Choose either:
- Effective Life (Yrs) - Xero calculates a rate by dividing 100% by the effective life entered.
- Rate - Xero depreciates the asset each year by the percentage entered.
For example, if the depreciable value of an asset is 1300 and you:
- Enter a rate of 20%, the annual depreciation for the first three years is:
- First year - 260 (1300 x 20% = 260)
- Second year - 208 (1300-260 = 1040), (1040 x 20% = 208)
- Third year - 166.40 (1040-208 = 832), (832 x 20% = 166.40)
- Enter an effective life of 8 years, the rate is 12.5%, and the annual depreciation for the first three years is:
- First year - 162.50 (100% ÷ 8 = 12.5%), (1300 x 12.5% = 162.50)
- Second year - 142.19 (1300 - 162.50 = 1137.50), (1137.50 x 12.5% = 142.19)
- Third year - 124.41(1137.50 - 142.19 = 995.31) (995.31 x 12.5% = 124.41)