Declining balance depreciation is used when the asset value is high during the first years but is then reduced. In this case, the depreciation is largest during the first year and thereafter less and less. The method is based on a percentage of the remaining value from the previous period.
A company has invested in a machine for USD 15,000. The machine's financial lifetime is estimated to be five years. Using the acquisition value, the yearly depreciation is as follows (compared with the result if linear depreciation is done):
|Year||Declining Depreciation (30%)||Linear Depreciation (15,000/5=3,000)|
According to the declining balance method, depreciation is done with a fixed percentage, such as 30% per year. The remaining amount (2,065) can be posted as an extra depreciation, so the amount is fully written off.