Declining Balance Method of Depreciation Definition





Declining balance method of depreciation is a technique of accelerated depreciation in which the amount of depreciation that is charged to an asset declines over time. In other words, more depreciation is charged during the beginning of the life time and less is charged during the end.

Why more depreciation is charged in beginning years? The reason is that assets are usually more productive when they are new and their productivity declines gradually. Thus, in the early years of their life time, assets generate more revenue as compared to the revenue generated in later years of their life. According to the matching principle of accounting, we should depreciate more of the asset's cost in early years to match the depreciation expense with the revenue earned from the use of the asset.

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Formula and Calculation for Declining balance depreciation





Formula and Calculation Procedure:

Declining balance depreciation is calculated using the following formula:
Depreciation = Depreciation Rate × Book Value of Asset
                   
Depreciation rate is given by the following formula:
Depreciation Rate = Accelerator × Straight Line Rate

In the above formula, accelerator is a multiplication factor which accelerates depreciation. Book value is the difference between cost of an asset and its accumulated depreciation. During the first accounting period, accumulated depreciation is zero so book value is equal to cost. Since the book value decreases after each depreciation charge, depreciation expense declines in successive charges.

Depreciation is charged according to the above method as long as book value is less than the salvage value of the asset. No more depreciation is provided when book value equals salvage value.

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Accounting for Management - Accounting theme from Business Law.