Declining Balance Depreciation – Definition

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Declining Balance Depreciation Definition

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 asset’s useful life and gradually lower amounts in later years.

A Little More on Declining Balance Depreciation

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 asset’s net value at the beginning of an accounting period. Residual value is the salvage value estimated at the end of the asset’s useful life. The depreciation rate is determined by the estimated pattern of an asset’s use over its useful life.

References for Declining Balance Depreciation

Declining Balance Depreciation

The measurement of depreciation in the US national income and product accounts, Fraumeni, B. (1997). SURVEY OF CURRENT BUSINESS-UNITED STATES DEPARTMENT OF COMMERCE, 77, 7-23. This paper studied the measurement of depreciation in the United States national income and product account. It should be noted that the national income for every state or nation should always be monitored especially when it indicates depreciation. This paper, however, explains how depreciation can be measured.

The measurement of US real capital input, 1929–1967, Christensen, L. R., & Jorgenson, D. W. (1969). Review of Income and Wealth, 15(4), 293-320. The main aim of this paper is to construct a vital mean/model which can be used to measure real capital input. These methods should, however, be based on lasting inventory estimates of the corresponding estimates and the capital stock of the capital service prices. Estimates of the capital input in constant and current price are majorly constructed for household and non-profit institutions, non-corporate business and corporate business in the United States for the period of 1929-1967. Note that the services and stock prices can be adjusted for the relative utilization of capital.

Accounting standards and value relevance of financial statements: An international analysis, Hung, M. (2000). Journal of accounting and economics, 30(3), 401-420. According to this paper, a 17,743 firm-year observation gotten from industrial companies in 21 different countries from the period of 1991-1997 was estimated. This study indicates that the adoption of the accrual accounting method (Versus the cash accounting method) affects the relevance value of financial statements in countries having weak shareholder protection negatively. These results are stable with the assumption that the shareholder protection in one way or the other has helped improve the effectiveness of the accrual; accounting and it has also helped to suggest the advantages of considering the shareholder’s protection when measuring various accounting policies related to accrual.

From Double-DecliningBalance to Sum-of-the-Years’-Digits Depreciation: An Optimum Switching Rule, Schwab, B., & Nicol, R. E. (1969). Accounting Review, 292-296. This paper studied the sum total of the year’s digit depreciation by making use of what is called “An optimum switching rule”. However, this method is attempted from the Double declining balance to the sum of the year’s digit depreciation.

Effects of tax policy on investment in manufacturing Coen, R. M. (1968). The American Economic Review, 58(2), 200-211. According to this study, the effect of tax policies on investment in most manufacturing firms and industries was studied. This paper explains the reason why tax policies are placed on investment especially in firms where manufacturing is carried out on a large scale.

Uncertainty resolution and the theory of depreciation measurement,  Feltham, G. A., & Ohlson, J. A. (1996). Journal of accounting research, 209-234. This paper explains the uncertainty resolution as well as the theory behind the measurement of depreciation. This study shows the different ways in which depreciation can be accurately measured.

Effects of tax depreciation policy and investment incentives on optimal equipment replacement decisions: comment, Kay, R. D., & Rister, E. (1976). American Journal of Agricultural Economics, 58(2), 355-358. In this paper, the effect of tax depreciation policy and investment incentives levied on optimal equipment was studied and explained. This study shows the various methods that can be used to explain the importance of investment incentives and that of the tax depreciation policy via a replacement decision.

EC accounting harmonisation: An empirical study of measurement practices in France, Germany and the UK, Emenyonu, E. N., & Gray, S. J. (1992). Accounting and Business Research, 23(89), 49-58. According to this paper, several attempts were made to study the extent to which accounting practices and measurements in Germany, United Kingdom and France can be brought together in harmony as a means of promoting EC accounting harmonization. The statistical test carried out in this paper indicates that there are significant differences between the United Kingdom, Germany and France in respect to all the type of practices estimated. A wide and relatively low range of value was observed from the measurement of the overall level of the international accounting harmony across the three countries.

Changing from declining balance to straight-line depreciation, Greene, E. D. (1963). The Accounting Review, 38(2), 355. This paper explains how a firm or country can change from a declining balance to straight-line depreciation. The various steps to take were also explained and the advantages of switching to straight-line depreciation over the declining balance were also discussed.

The new economics of accelerated depreciation, Auerbach, A. J. (1982).  In this paper, a description of the provision of a new treatment of the depreciable property and analyses in a nontechnical manner as regards the economic impact of the recovery Tax Act of 1981 which includes the largest business tax cut in the history of the United States which includes the accelerated cost recovery system was studied and explained. Rapt attention is placed on the novel part of the ACRS which creates a “safe house” for a large no of sale-leaseback arrangement by efficiently and effectively allowing the sale of depreciation deductions by investors with no taxable income.

 

International Company Taxation, Schreiber, U. (2013). In International Company Taxation (pp. 1-25). Springer, Berlin, Heidelberg. This paper explains the international company taxation and how the taxpayers organize their economic activities in different legal ways mostly the sole proprietorships, corporations and partnerships. It should, however, be noted that partnership, as a rule, possesses a limited legal personality. The legal availability of partnership may cease to a change of partners. It should, however, be noted that company laws allow corporations the full legal personality. The legal availability of corporation is said to be unaffected by a change in the ownership of shares which is a little bit different from that of partnership. Lastly, this paper attests that natural individuals, corporations and partnerships may act as shareholders of corporations and also partners of partnerships.

Capital Budgeting and the” Best” Tax Depreciation Method, Davidson, S., & Drake, D. F. (1961). The Journal of Business, 34(4), 442-452. According to this paper, the capital budgeting and the “best” tax depreciation method was discussed and explained. The advantages of this method over other method and the reason why it was regarded as the best depreciation method was also explained in this paper.

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