Diminishing balance method of providing depreciation

Diminishing balance method of providing depreciation is very important from accounting point of view. In this method, accountant calculates depreciation on the asset from which he deducts all previous depreciation from asset. So, every year amount of depreciation will go down.

For example

Suppose we purchase a machinery at $ 50000 and if we fix 10 % depreciation on machinery with diminishing balance method , then first year depreciation will $ 5000 , next year will calculate depreciation $ 50000 - $ 5000 = $ 45000 X 10 % = $ 4500

Third year depreciation will apply on $ 45000 - $ 4500 = $ 40500

So, we calculate depreciation on written down value of asset so , its other name is written down method or reducing value method .
Now we are seeing the value of depreciation is decreasing

Ist year = $ 5000
2nd year = $4500
3rd year = $ 4050

Benefit or advantages of this method

  1. This is also very easy method.
  2. This is very scientific method and provides logic that which asset is abolish due to spending of time at that portion of depreciation is not included in asset.
  3. Income tax officer prefers this method for assessment of business and professional income.
    If we buy any asset after first year, we need not to calculate depreciation from beginning.

Disadvantages of this method

  1. In this method we also ignore interest on capital which is used for purchasing such asset.
  2. All new and old assets are mixed with each other, for an auditor, it is so difficult to differ among them.
  3. It is difficult to calculate optimum rate of depreciation

    But we can use following formula for calculating depreciation in W.D.V. method.

    R = 1 – ( S/C) 1/n

    R = rate of depreciation
    S = S is scrape value
    n = n is the working life of an asset
    c = c is cost of asset

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Accounting Education: Diminishing balance method of providing depreciation
Diminishing balance method of providing depreciation
Accounting Education
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