Suppose the cost of asset is $1,000
and rate of depreciation 10% p.a.
Cost of asset 
1,000 
Depreciation: 

1st year: 10% of 1,000 
100 


Book value 
900 
2nd year: 10% of 900 
90 


Book value 
810 
3rd year: 10% of 810 
81 


Book value 
729 


and so
on....... 

Under fixed installment method
the amount of annual depreciation remains the
same but under reducing balance method the
amount of annual depreciation gradually reduces.
This method is especially
suitable to assets with long life, e.g., plant
and machinery, furniture, motor car etc.
Under this method the real cost
of using an asset is the depreciation and repair
expenses so this method gives better results
because in early years when repair expenses are
less the depreciation is more. As the asset gets
older repair charges on it increases and the
amount of depreciation decreases. So the
combined effect of both these costs remain
almost constant on the profit and loss of each
year.
The great weakness of this
method is that it takes very long time to write
off an asset to approximately nil, unless a very
high rate is used, in which case the burden on
earlier years shall be excessive. This method is
used by income tax authorities for granting
depreciation allowance to assesses.
Formula for the Calculation of
Depreciation Rate:
The calculation of correct rate
of depreciation is very important under this
method. Following formula should be applied
under given conditions:
When the cost of asset, residual
value and useful life of an asset is given:
r = 1  (S/C)^{1/n}
Where:
r = Rate of depreciation
n = Estimated useful
life of asset
S = Residual value after
the expiry of useful life
C = Original cost of
asset 
Example 2:
If n = 3 years, S = 64,000 and C
= 1,000,000 calculate rate of depreciation.
r = 1 
(64,000/1,000,000)^{1/3}
= 1  40/100
= 60/100
= 60% 
Difference Between Straight
Line Method and Reducing Balance Method:
Following are the main points of
difference between straight line method and
reducing balance method of depreciation:
Straight Line Method 
Reducing Balance Method 
1. 
The rate
and amount of depreciation remain the
same each year. 
1. 
The rate remains the
same, but the amount of depreciation
diminishes gradually. 
2. 
Depreciation rate per cent is calculated
on cost of assets each year 
2. 
Depreciation rate per
cent is calculated on book value of
asset. 
3. 
At the end
of its life the value of asset is
reduced to zero or scrap value. 
3. 
The value of asset is
never reduced to zero at the end of its
life. 
4. 
The older
the asset the larger the cost of its
repair. But the amount of depreciation
remain the same each year. Hence, the
total of depreciation and repairs
increases every year. This reduces
annual profit gradually. 
4. 
The amount of
depreciation decreases gradually, while
the cost of repairs increases. So the
total of depreciation and repairs remain
more or less the same each year. Hence,
it causes little or no change in annual
profit/loss. 
5. 
Computation
of depreciation under straight line
method is comparatively easy and simple. 
5. 
Depreciation can be
computed without any difficulty, but it
is not easy and simple. 