Diminishing balance method in accounting is the method by which the total amount of the depreciation can be calculated like some fixed percentage of the diminishing and reducing value of any asset that can stand in books during the beginning of an annual year so that it can bring the book value down to its initial residual value. The depreciation amount decreases every year. This means that the depreciation amount does not remain fixed but gradually decreases annually. It is also said that the depreciation method is the same as the Fixed Instalment Method.
How to Calculate Diminishing Value Depreciation
While purchasing an asset at the beginning of the year, one needs to calculate the total depreciation for that whole year applying the diminishing value method.
To do so, one needs to follow some instructions and few methods by using the Reducing Balance Method. It comes under the diminishing balance method other names. The steps are as follows:
One has to find the correct rate of depreciation
Subtract the total scrap value from the total asset cost
Multiply the whole book value by maintaining the depreciation rate
Diminishing Balance Method Formula
Diminishing refers to reduction or decline. Hence, diminishing method refers to the reduction or declining method.
Thus, the diminishing balance method formula is:
Depreciation expenses = (Net Book Value – Residual Value) * Depreciation Rate
Depreciation expenses are the charge of the fixed assets that are converted to the income statement of that specific period. The period can be a week or a month or a year.
Net Book Value refers to the value of the fixed asset that appears after depreciation. The asset of the Net Book value is equal to the total cost of the initial recognition that can be reduced because of the depreciation.
The fixed asset of the residual value is the value that is expected from the fixed asset at the end of the period that is given to the asset.
The diminishing value depreciation method includes the rate that is provided to the people for particular assets.
Examples of diminishing Value Depreciation Method
For example, a company has brought a car that values INR 500,000 and the useful life of the car as expected by the buyers is ten years. And the residual value is expected to be INR 24,000.
Hence, using the diminishing method calculate the depreciation expenses.
The rate of depreciation is 60%
The formula says: Depreciation expenses = (Net Book Value – Residual Value) * Depreciation Rate
The value of the statement is as follows:
Net Book Value = INR 500,000 (in the first year which is equal to the cost of the car)
Residual Value = INR 24,000
Depreciation Rate = 60%
Therefore, the solution will be:
Depreciation Expense= (500, 000 – 24,000)* 60% = INR 2,85,600
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