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Definition of reducing balance method or Declining balance method of depreciation
In this reducing balance method of depreciation, depreciation is charged on the assets based on the reduction value of the assets. A fixed percentage (%) of a depreciation rate is assigned on the reduced value of the assets. The depreciation value/ amount in the earlier years is higher than that in another year.
This method also called/ known as diminishing balance method, written down value method, declining balance method.
In the declining balance method the depreciation rate is calculated using the following formula:
For example:
The original cost of a machine purchased on July 1, 2008 was Rs. 90,000. The estimated scrap value at the end of three years was Rs. 5,000.
Required: Calculate the rate of depreciation under the reducing balance method and prepare depreciation schedule.
Solution:
Here,
Original cost (OC) = Rs. 90,000
Scrap value (SV) = Rs. 5,000
Estimated life (n) = 3 years
Using the declining balance method
= 0.6183 or 61.83%
Therefore, required rate of depreciation = 61.83%
Now,
Depreciation schedule under declining balance method
| Period | Annual depreciation | Accumulated depreciation | Ending value |
| July 1, 2008 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 | – Rs. 27,823.5 Rs. 38,443.73 Rs. 14,673.97 | – Rs. 27,823.5 Rs. 66,267.23 Rs. 80,941.20 | Rs. 90,000 Rs. 62,176.5 Rs. 23,732.77 Rs. 9,058.80 |