4. Declining Balance Depreciation
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.
Note: The acquisition cost cannot be fully depreciated to 0 using declining balance. To work around this, you enter a 'stop value' and a 'residual value':
- The stop value is where the depreciation ceases when the residual value falls below the stop value. A life span is consequently not registered for declining balance method.
- The residual value processing determines whether the remaining value should remain or be posted as an extra depreciation.
4.1 Example
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) |
|---|---|---|
| 1 | 4,500 | 3,000 |
| 2 | 3,150 | 3,000 |
| 3 | 2,205 | 3,000 |
| 4 | 1,544 | 3,000 |
| 5 | 1,080 | 3,000 |
| Remaning | 2,065 | 0 |
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.