Declining Balance Method of Depreciation

Declining method of depreciation is a method of depreciation in which depreciation is charged on the declining value of the asset. It is also called written down value or diminishing balance method of depreciation. Under this method deprecation rate is fixed in advance by the company. Deprecation is calculated by using the flowing formula = Depreciation rate * Book value of asset at the beginning of year.

So for example if a company purchases an asset worth $5000 and deprecation rate is 20 percent then deprecation in first year will be $1000. Book value of asset in the beginning of second year will be $4000, so deprecation for second year will be $800 ($4000*20%). So under Declining method of depreciation deprecation will keep on declining every year.

The biggest advantage of using this method is that since under this method of deprecation higher depreciation is charged in early years it takes into account that asset is more efficient in early years and gradually its efficiency declines and hence declining method of depreciation is more realistic method of depreciation. However it suffers from a drawback that under this method value of asset will never be zero even if the asset is of no use to a company (which is not the case with straight line method of deprecation where the value of asset becomes zero).

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