Declining-Balance Depreciation Method
Usually, depreciation is referred to as a decrease in the value of the assets over their useful life. This concept of depreciation is known as fair value depreciation. The other concept in the calculation of the depreciation is known as depreciation with the matching principle. This method is the cost allocation of the asset to the period in which they are used. These two methods have their respective uses, and the fair value method affects the value of a business while depreciation with the matching principle affects the net income of the business. Generally, the cost allocated to the assets is treated as the depreciation expense and is recognized as an expense for the tax and financial reporting purposes.
Types of depreciation
The depreciation of the assets can be calculated by many different methods. All these methods are valid and the adaptation of one of these methods for an asset is based entirely on the judgment of the company or the generally accepted accounting principles (GAAP) in the country the business is operating. In addition, it is also not necessary for the company to adopt a single depreciation method for all of its method, and it is allowed to use separate methods of depreciation for the separate assets of one company. The different types of depreciation method are:
- Straight line depreciation method
- Declining-Balance depreciation method
- Fixed percentage depreciation method; and
- Sum-of-years’ digit method; etc
Declining-balance depreciation method
Declining-balance depreciation method is one of the most popular depreciation methods apart from the straight-line method. It is also known as reducing balance method. In this method, the depreciation charged to the asset in the early years of asset life is higher, and it gradually decreases as the years pass. This method continues to decrease the value of the asset over its useful life until at the end of assets’ life, all there is left is a residual value. This residual value is the scrap value at which assets can be sold in the market after its useful life is finished.
Double declining-balance method
Double declining-balance method is another method of the depreciation that uses the depreciation rate. In this method, you have to calculate the straight-line depreciation first and then double the rate you get from the straight-line depreciation method.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software