Depreciation is the decrease in the value of fixed assets due to normal wear and tear, efflux of time or obsolescence due to technology. Thus, depreciation is an expense and we charge it to Profit and Loss A/c at the end of the year. One of such methods of charging depreciation is Declining Charge Method.
This formula is derived from the study of the behaviour of the assets over a period of time.
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Charging Depreciation – Declining Charge Method
Under these methods, the depreciation amount decreases for every subsequent year. Usually, we apply these methods when the receipts from the assets decline and it becomes essential to charge the depreciation as per the asset’s expected earnings.
The methods of charging depreciation that fall under this category are:
 Diminishing Balance Method
 Sum of Years’ Digit Method
 Double Declining Method
Diminishing Balance Method
According to the Diminishing Balance Method, we charge depreciation at a fixed percentage on the book value of the asset appearing in the Balance Sheet.
As the book value of the depreciable asset reduces every year, it is also known as Reducing Balance Method or Writtendown Value Method.
As the book value of the asset reduces every year applying this method, hence the amount of depreciation expense also reduces every year. Thus, under this method, the value of the asset never reduces to zero or becomes nil.
The assumption underlying is that in the earlier years the cost of repairs to the assets are low and hence there is a requirement to charge more amount of depreciation.
Also, in the later years, the cost of repairs will increase and therefore the charge of depreciation will be less. Hence, as a result, there is an equal burden on the profit every year during the useful life of the asset.
This method also considers the period of use of the asset. When an asset is in use only for 4 months in a year then we charge depreciation only for 4 months.
However, the Income Tax Act states that if an asset is in use for more than 180 days, we need to charge full years’ depreciation. Income Tax Rules allow depreciation charged on Reducing Balance Method.
Formula:
 Rate of Depreciation = [1 – \(\sqrt[n]{s/c}\)] x 100
Where, n = useful life
s = scrap value
c = cost of asset
 Amount of depreciation = Book Value x \(\frac{ Rate of Depreciation}{100}\)
Journal entry for Diminishing Balance method of Depreciation:
Date  Particulars  Amount
(Dr.) 
Amount
(Cr.) 

1. Purchase of asset  Asset A/c  Dr.  
To Cash/ Bank/ Creditor’s A/c  
(Being asset purchased)  
2. Charge Depreciation  Depreciation on Asset A/c  Dr.  
To Asset A/c  
(Being depreciation charged on the book value of the asset)  
3. Transfer Depreciation  Profit & Loss A/c  Dr.  
To Depreciation on Asset A/c  
(Being transfer of depreciation on the asset to profit and loss account) 
Advantages of Diminishing Balance Method:
 This method lays an equal burden on the profit of every year as depreciation decreases every year and repair expenses increase every year.
 It is permissible to charge depreciation using this method as per the Income Tax Act.
 As the major part of depreciation is charged in the earlier years the problem of obsolescence is given due care. Thus, it is easy to replace the asset.
Disadvantages of Diminishing Balance Method:
 Under this method, it is difficult to calculate the appropriate rate of charging depreciation. Thus, it may happen that at the end of the useful life of the asset full depreciation is not provided.
 The cost of the asset never becomes nil.
 This method does not distribute the depreciation uniformly throughout the useful life of the asset.
Solved Example For You:
M/s. Bhanu and sons purchase a machine on 1 Apr 2015 for ₹750000 from AB & Co. and paid ₹50000 on its installation. The estimated useful life of the machine is 3 years. The estimated residual value of the machine is ₹40000. On 31^{st} March 2018, the machine was sold for 250000. Depreciation is charged as per the W.D.V. method @10 % p. a. Prepare the necessary ledger accounts for the year ending 31^{st} December every year for charging depreciation.
Ans.
In the books of M/s. Bharat and sons
Machinery A/c
Date  Particulars  Amount  Date  Particulars  Amount  
2015  2015  
1 Apr  To AB & Co. A/c  750000  31 Dec  By Depreciation A/c  60000  
To Cash A/c (installation exp.)  50000  31 Dec  By balance c/d  740000  
800000  800000  
2016  2016  
1 Jan  To balance b/d  740000  31 Dec  By Depreciation A/c  74000  
31 Dec  By balance c/d  666000  
740000  740000  
2017  2017  
1 Jan  To balance b/d  666000  31 Dec  By Depreciation A/c  66600  
31 Dec  By balance c/d  599400  
666000  666000  
2018  2018  
1 Jan  To balance b/d  599400  31Mar  By Depreciation A/c  14985  
31 Mar  By Cash A/c  250000  
By Profit & Loss A/c ( loss on sale of machinery)  334415  
401625  401625 
Depreciation A/c
Date  Particulars  Amount  Date  Particulars  Amount  
2015  2015  
31 Dec  To Machinery A/c  60000  31 Dec  By Profit & Loss A/c  60000  
2016  2016  
31 Dec  To Machinery A/c  74000  31 Dec  By Profit & Loss A/c  74000  
2017  2017  
31 Dec  To Machinery A/c  66600  31 Dec  By Profit & Loss A/c  66600  
2018  2018  
31 Mar  To Machinery A/c  14985  31 Dec  By Profit & Loss A/c  14985 
Working Notes:
 Calculation of amount of depreciation
Depreciation = Book Value x \(\frac{Rate of depreciation}{100}\)
2015
Depreciation = 800000 x \(\frac{10}{100}\) x \(\frac{9}{12}\)
= 60000
2016
Depreciation = 740000 x \(\frac{10}{100}\) = 74000
2017
Depreciation = 666000 x \(\frac{10}{100}\) = 66600
2018
Depreciation = 599400 x \(\frac{10}{100}\) x \(\frac{3}{12}\) = 14985
 Calculation of loss on sale of machinery
Loss = Book Value on 1^{st} Jan 2018 – depreciation for 3 months – cash received on the sale
= 599400 – 14985 250000 = 334415
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