How Xero calculates declining balance depreciation

Declining 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.

Depreciable value

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 organization 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).

If the monthly amount has more than 2 decimal places, Xero automatically rounds it to 2 decimal places. Some months may differ by a few cents so the annual amount is correct.

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 organization 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).

For leap years, Xero uses 366 days to calculate monthly depreciation.

Depreciation rate

Xero will use the depreciation type you select to calculate the depreciation rate. Choose either:

  • Effective Life (Yrs) - Xero calculates a rate by dividing the declining balance percentage (100%, 150%, or 200%) by the effective life entered.
  • Rate - Xero depreciates the asset each year by the percentage entered. No adjustment is made if Declining Balance (150%) or Declining Balance (200%) is selected.

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, and Declining Balance (150%), the rate is 18.75%, and the annual depreciation for the first three years is:
    • First year - 243.75 (150% ÷ 8 = 18.75%), (1300 x 18.75% = 243.75)
    • Second year - 198.05 (1300-243.75 = 1056.25), (1056.25 x 18.75% = 198.05)
    • Third year - 160.91 (1056.25 - 198.05 = 858.20) (858.20 x 18.75% = 160.91)