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Declining balance method

The declining or diminishing balance method is used for those assets that are most productive when they are new. Under this method, the book value of the asset is multiplied by a fixed rate so that higher depreciation is charged against the asset in the first year with the depreciation charge decreasing in subsequent years. The following illustrates how the calculation is done.

A machine is purchased for $80,000 and the salvage value is estimated to be only $2,500 at the end of the fifth year as the machine is manufactured for just a particular purpose. The diminishing balance method of calculation of depreciation rates is as follow:


Year

Percentage applied

Book value of asset

Depreciation

Accumulated Depreciation


Asset Balance

1

50%

80,000

40,000

40,000

40,000

2

50%

40,000

20,000

60,000

20,000

3

50%

20,000

10,000

70,000

10,000

4

50%

10,000

5,000

75,000

5,000

5

50%

5,000

2,500

77,500

2,500*

* Estimated salvage value

Last Updated (Friday, 03 September 2010 18:43)