What Is the Declining Balance Method?
The declining balance approach is an sped up depreciation system of recording higher depreciation expenses right through the earlier years of an asset’s useful life and recording smaller depreciation expenses right through the asset’s later years.
Key Takeaways
- In accounting, the declining balance approach is an sped up depreciation system of recording higher depreciation expenses right through the earlier years of an asset’s useful life while recording smaller depreciation right through its later years.Â
- The program turns out to be useful for recording the depreciation of pc techniques, cell phones, and other high-technology products that all of a sudden turn into old-fashioned.
- The declining balance way represents the opposite of the straight-line depreciation approach, which is further suitable for belongings whose e ebook price without end drops over time.
Methods to Calculate Declining Balance Depreciation
Depreciation underneath the declining balance approach is calculated with the following way:

get started{aligned} &text{Declining Balance Depreciation} = CBV circumstances DR &textbf{where:} &CBV=text{provide e ebook price} &DR=text{depreciation charge (%)} end{aligned} ​Declining Balance Depreciation=CBVĂ—DRwhere:CBV=provide e ebook priceDR=depreciation charge (%)​
Provide e ebook price is the asset’s web price first of all of an accounting period, calculated by way of deducting the amassed depreciation from the cost of the mounted asset. Residual price is the estimated salvage price at the end of the useful life of the asset. And the velocity of depreciation is printed consistent with the estimated pattern of an asset’s use over its useful life. For instance, if an asset costing $1,000, with a salvage price of $100 and a 10-year life depreciates at 30% every year, then the expense is $270 inside the first year, $189 in the second year, $132 inside the third year, and so on.
What Does the Declining Balance Method Tell You?
The declining balance approach, steadily known as the reducing balance approach, is absolute best for belongings that in brief lose their values or inevitably turn into old-fashioned. This is classically true with computer equipment, cell phones, and other high-tech items, which can be normally useful earlier on then again turn into a lot much less so as newer models are delivered to market. An sped up approach of depreciation in spite of everything parts inside the phase-out of the ones belongings.
The declining balance way represents the opposite of the straight-line depreciation approach, which is further suitable for belongings whose e ebook price drops at a steady charge right through their useful lives. The program simply subtracts the salvage price from the cost of the asset, which is then divided by way of the useful life of the asset. So, if a company shells out $15,000 for a truck with a $5,000 salvage price and a useful life of five years, the annual straight-line depreciation expense equals $2,000 ($15,000 minus $5,000 divided by way of 5).
Declining Depreciation vs. the Double-Declining Method
If a company regularly recognizes large options on product sales of its belongings, this may occasionally most likely signal that it’s the utilization of sped up depreciation methods, such for the reason that double-declining balance depreciation approach. Internet income it will be lower for a couple of years, then again on account of e ebook price in the end finally ends up being less than market price, this in spite of everything results in a bigger gain when the asset is purchased. If this asset remains to be valuable, its sale might portray a misleading symbol of the company’s underlying neatly being.
The usage of the sped up depreciation way way there it will be smaller taxable income inside the earlier years of an asset’s life.
