Diminishing Balance Depreciation Method: Explanation, Formula, and Example

Explanation:

The diminishing balance depreciation method is one of the three depreciation methods mentioned in IAS 16. This kind of depreciation method is said to be highly charged in the first period, and then subsequently reduce.

This is because the charging rate is applying to the Net Book Value of Assets and the Net Book Value of Assets is reduced from time to time after charging depreciation.

But, how? Well, the diminishing balance depreciation method is just another word called declining balance or double declining balance. That is the reason why these two methods did not mention in the standard IAS 16.

How to perform the diminishing balance depreciation method?

As we mentioned above, this method is the same thing as declining balance or double declining. Therefore, if you know how declining balance and double-declining work, you already know how diminishing work. Because diminishing is the parent word of these two.

Confusing right?

Before we go to a detailed explanation, let us explain the literal meaning of diminishing so that it can help you to understand its method.  

Okay, diminishing means decline or reduction. So, a diminishing method means a declining or reducing method.

For declining balance, the depreciation charge is equal to the net book value less residual value and multiply it with the depreciation rate that you provide.

Now let’s see the formula for diminishing balance,

Formula:

Depreciation Expenses = (Net Book Value – Residual value) X Depreciation Rate

  • Depreciation expenses here the charging of fixed assets into income statement for the specific period. It can be moth or year.
  • Net Book Value is the value of fixed assets after depreciation. The Netbook value of assets is equal to cost for initial recognition and it is subsequently reduced because of depreciation. The subsequent measurement of the net book value of fixed assets is equal to the cost of fixed assets – accumulated depreciation.
  • The residual value of fixed assets is the expected value of fixed assets at the end of the assets’ expected useful life.
  • The depreciation rate is the rate that we provide for assets. For example, if you provided the depreciation rate for office build amount of 5%. That means, you assume technically the value of the build should reduce 5%.
Related article  How to Calculate the Residual Value of Fixed Assets?

Example:

Your company just bought a car valued at USD105,000 and the expected useful life of the car would be ten years and the residual value of the car is expected USD5,000.

Use the diminishing balance depreciation method to calculate depreciation expenses. The depreciation rate is 60%

Well, here is the formula

Depreciation Expenses = (Net Book Value – Residual value) X Depreciation Rate

Here is the value of each element:

  • Net Book Value = USD 105,000 (first year equal to the cost of the car.)
  • Residual value = USD 5,000
  • Depreciation Rate = 60%

Here are depreciation expenses:

Diminishing balance depreciation method

Well, now that is all for the diminishing balance depreciation method and if you feel doubt about my explanation, just drop your question here. I will try to explain more to you.

Written by Sinra