Fixed assets need to be depreciated after their acquisition in order to reflect the usage and the wear and tear of the asset over time. There exist many ways to calculate depreciation, usually depending on the type of assets and how fast their value decreases. The declining balance is one of the depreciation methods that companies can use to depreciate assets and it’s a common practice. In this article, we will be explaining the declining balance depreciation method and provide an example so that you can clearly understand how it works.
Declining Balance Depreciation: What Is It?
Declining balance is a method used to depreciate assets where the depreciation expense is higher in the beginning of the useful life of the asset. The expense decreases as the years go by. The declining balance is considered as an accelerated depreciation method, unlike the straight-line method where the depreciation expense is the same amount every year.
This is a good method to be used for assets that lose their value mostly in the earlier years of their expected useful life. Products like computers, cars or anything technological would be good candidates for the declining balance depreciation.
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Sum of Years (Depreciation Method with Example)
How To Calculate Depreciation With Declining Balance [Formula]
In order to calculate the depreciation expense with declining balance, you will need three data points:
- The book value of the asset
- Salvage value (or residual value) of the asset
- Depreciation rate in percentage
Whereas the book value of an asset is the cost of the asset minus any accumulated depreciation, the salvage value is what the asset would be worth at the end of its expected useful life and depreciation rate is the percentage an asset’s worth decreases over time.
The depreciation rate can be determined by a company based on historical data for similar assets or by looking at industry data.
The following formula is used to determine the depreciation expense under declining balance method:
(Book value of the asset – Salvage value) x Depreciation rate
As a general guidance, we’re displaying the rates usually used for certain types of assets:
| Motor vehicle | 20% – 30% |
| Computers | 30% – 40% |
| Furniture | 10% – 15% |
| Office equipment | 10% – 20% |
| Equipment and machinery | 10% – 20% |
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Units of Production (Depreciation Method Explained)
Calculation Example: Declining Balance Depreciation
Looking at an example will help with further understanding this method. We will look at the case of Carl’s Construction Company (“CCC”). CCC purchased new machinery for the construction business at a cost of $50,000 with a salvage value of $4,000. Based on past experience, the same type of machinery has a useful life of 8 years and is depreciated at a rate of 15%.
In order to calculate the depreciation, we use the formula shown above. The first year’s depreciation expense will be $6,900 (obtained with this mathematical calculation: ($50,000 – $4,000) x 15%).
The second year’s depreciation expense will be $5,865 (obtained with this mathematical calculation: ($43,100 – $4,000) x 15%). The $43,100 used as book value is obtained by removing the first year’s depreciation ($6,900) from the cost ($50,000).
The table below shows the depreciation expense for each of the 8 years:
| Formula | Depreciation expense | Value at end of year | |
| Year 1 | ($50,000 – $4,000) x 15% | $6,900 | $39,100 |
| Year 2 | $39,100 x 15% | $5,865 | $33,235 |
| Year 3 | $33,235 x 15% | $4,985 | $28,250 |
| Year 4 | $28,250 x 15% | $4,237 | $24,012 |
| Year 5 | $24,012 x 15% | $3,602 | $20,410 |
| Year 6 | $20,410 x 15% | $3,062 | $17,349 |
| Year 7 | $17,349 x 15% | $2,602 | $14,747 |
| Year 8 | $14,747 x 15% | $2,212 | $12,535 |
Bottom Line: Declining Balance Depreciation Method
The declining balance depreciation is a simple method to calculate the depreciation expense since it requires very little data points for the computation of the calculation. It’s a good method to be used for assets that lose their value quickly at the beginning of their expected useful life, such as highly technological products. The down side of this method is that the depreciation expense changes every year unlike the straight line method that has the same expense year on year. In order to become an expert in calculating depreciation, make sure you practice in various situations and you will eventually become a master in this topic.
