Declining Balance Depreciation - Explained
What is Declining Balance Depreciation?
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Table of ContentsWhat is Declining Balance Depreciation?How is Declining Balance Depreciation Used?What is Double Declining Balance Depreciation?Calculating the Double Declining Depreciation MethodExample of the Declining Depreciation MethodExample of the Double Declining Depreciation Method
What is Declining Balance Depreciation?
Declining balance is a method of computing depreciation rate for the value of an asset. The declining balance method is also known as reducing balance method or diminishing balance method. It is an accelerated depreciation method that results in larger depreciation amounts during the earlier years of an assets useful life and gradually lower amounts in later years.
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How is Declining Balance Depreciation Used?
It is a useful method for assessing the depreciation value of the assets with fast declining value. Computer equipment is one such asset, it has its usefulness in the initial years but becomes obsolete after some years and needs to be replaced by the newer technology. The accelerated method of depreciation is perfectly applicable in such cases. The formula for calculating depreciation value using declining balance method is, Depreciation per annum = (Net Book Value - Residual Value) x % Depreciation Rate Net Book value is the cost of a fixed asset minus the accumulated (total) depreciation. It is the assets net value at the beginning of an accounting period. Residual value is the salvage value estimated at the end of the assets useful life. The depreciation rate is determined by the estimated pattern of an assets use over its useful life.
What is Double Declining Balance Depreciation?
It is an accelerated depreciation method commonly used by businesses. It is applicable to the assets which are used for years and the usage declines with the passage of time. In this method, the book value of an asset is reduced (written down) by double the depreciation rate of the straight-line depreciation method.
Calculating the Double Declining Depreciation Method
The formula for calculating in this method is, Depreciation for a period = 2 * straight-line depreciation percent * book value at the beginning of the period. When a company buys an asset that will be used for a long time, they do not deduct the whole price as the expense in the purchasing year, rather they record it over several years. In accounting practices, the expenses are recorded against the revenue. As a company gains revenue from such an asset for many years, the expense is also recorded in that way. The double depreciation rate remains constant over the depreciation process. The same rate is applied to the reducing book value of the asset each depreciation period.
Example of the Declining Depreciation Method
The below video provides a detailed explanation of how to cary out the Declining Balance Method of Depreciation
Example of the Double Declining Depreciation Method
Another example, a business buys a machinery with $ 10,000 and the machinery is expected to last for 10 years. The salvage value of the machinery is 10% of the cost that is $1,000. In straight-line depreciation method the company would deduct [($10,000-$1,000)/10] = $900 per year. In Double declining balance method, the company would deduct 20% of $10,000 in the first year, 20% of $9,800 and so on. This method is generally used for calculating the depreciation of the assets that lose its value quickly.
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