125 percent reducing balance depreciation

This article gives an overview of the 125 percent reducing balance method of depreciation.

When you set up a fixed asset depreciation profile and select 125% reducing balance in the Method field on the Depreciation profiles page, fixed assets that are assigned to the depreciation profile are depreciated by the same percentage in each depreciation period. This percentage is calculated based on the service life of the asset. For example, if an asset has a service life of five years, the percentage is calculated as 25 percent (125% ÷ 5).

To set up 125% reducing balance depreciation, you must also select options in the Depreciation year field and the Period frequency field on the Depreciation profiles page. The options that are available in the Period frequency field vary, depending on the value that is selected in the Depreciation year field.

Select a depreciation year

You can select either Calendar or Fiscal in the Depreciation year field on the Depreciation profiles page. The default value is Calendar.

Your selection determines the options that are available in the Period frequency field. This field defines the depreciation accrual posting dates and amounts throughout the calendar year.

Calendar

You can keep the default value in the Depreciation year field, Calendar.

The Calendar option updates the depreciation base on January 1 of each year. Typically, the depreciation base is the net book value minus the scrap value. In the examples later in this topic, the depreciation base is the numerator in the first expression in the calculations column.

If you select Calendar as the depreciation year, the following options are available in the Period frequency field:

  • Yearly posts an amount on December 31.
  • Monthly posts a monthly amount at the end of each calendar month.
  • Quarterly posts a quarterly amount at the end of each calendar quarter (March 31, June 30, September 30, and December 31).
  • Half-Yearly posts a half-yearly amount at the calendar half year (June 30 and December 31).
  • Daily posts the depreciation amount for the daily depreciation method by using one transaction for each day.

Fiscal

If you select Fiscal in the Depreciation year field, 125% reducing depreciation is calculated based on the fiscal year for the fiscal calendar that is specified for the book, or for the fiscal calendar that is selected on the Ledger page. Fiscal calendars are set up on the Fiscal calendars page.

For example, for the fiscal year July 1 through June 30, the depreciation calculation starts on July 1. The fiscal year can be longer or shorter than 12 months. The depreciation is automatically adjusted for each period, and the length of the next fiscal year is determined by the setup of periods on the Fiscal calendars page.

If you select Fiscal as the depreciation year, the following options are available in the Period frequency field:

  • Yearly posts the total amount of the depreciation that is calculated for the fiscal year as one amount, on the last day of the fiscal year.
  • Fiscal period posts the total amount of the depreciation that is calculated for the fiscal year. This amount is accrued into the fiscal periods that are defined on the Fiscal calendars page.

Example of 125% reducing balance depreciation

Acquisition cost 11,000
Salvage value 1,000
Depreciation base 10,000
Service life years 5
Yearly depreciation percentage 25%

The 125% reducing balance method divides 125 percent by the service life years. That percentage will be multiplied by the net book value of the asset to determine the depreciation amount for the year.

Period Calculation of the yearly depreciation amount Book value Net book value at the end of the year
Year 1 (11,000 – 1,000) × 25% = 2,500 (11,000 – 2,500) = 8,500 (11,000 – 1,000 – 2,500) = 7,500
Year 2 7,500 × 25% = 1,875 (8,500 – 1,875) = 6,625 (7,500 – 1,875) = 5,625
Year 3 5,625 × 25% = 1,406.25 (6,625 – 1,406.25) = 5,218.75 (5,625 – 1,406.25) = 4,218.75
Note

Typically, when the amount that is calculated by using the 125% reducing balance depreciation method becomes less than the amount that would be calculated by using the straight line method, there is a conversion to the straight line method for the remaining life.