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Declining Balance Depreciation Definition

Definition

The word declining balance depreciation identifies at least one of the procedures of allocating the value of an asset over its expected life. The diminishing balance depreciation system is definitely an accelerated way of depreciation, and it is dependant on the premise that an advantage ‘s value declines at a better speed at early years of its life.

Calculation

Declining Balance Depreciation (percent ) = two / Serviceable Life of Asset

Explanation

Also referred to because the double-declining balance and diminishing balance method, the diminishing balance strategy to depreciation can be definitely an accelerated method, as it contributes to higher depreciation worth in early years of their advantage ‘s life in accordance with the straightline approach. This strategy is predicated upon the premise that an advantage provides increased significance as it really is newer.

The diminishing balance method doesn’t take under consideration the salvage price of this advantage when calculating the yearly depreciation expenditure. Nevertheless, the book value of this asset can not be less compared to its price worth. Adjustments have to be built into the ultimate season of jealousy to protect against the publication value from falling below the strength ‘s price value.

Depreciation is a bookkeeping system of cost allocation. It’s utilized to allocate the price of an asset over its life. Depreciation makes it possible for the fee of a balance sheet thing (an advantage ) to stream smoothly to the revenue statement (being a cost ) within its life span.

Example

Company A purchases a backup generator for about $200,000. The service life of this generator is anticipated to be ten decades. The generator is anticipated to have a scrap value of $50,000 in the end of its life. The diminishing balance depreciation rate will be:

= two / 10 or 20 percent annually

In the very first year of performance, the depreciation cost with this particular generator could be:

= 20% x 200,000
= 0.2 x 200,000, or even $40,000

A whole diminishing balance depreciation program for your advantage is revealed beneath:

Depreciation Expense Accumulated Depreciation Book Value
Year 0 $200,000
Year Inch $40,000 $40,000 $160,000
Year two $32,000 $72,000 $128,000
Year 3 $25,600 $97,600 $102,400
Year 4 $20,480 $118,080 $81,920
Year 5 $16,384 $134,464 $65,536
Year 6 $13,107 $147,571 $52,429
Year 7 $2,429 $150,000 $50,000

Note this in Year 7, the depreciation expenditure is capped at $2,429 to protect against the publication price of the generator out of falling beneath the cap value of their advantage ($50,000).