Diminishing Balance Method

The various methods of depreciation are based on a formula. This formula is derived from the study of the behavior of the assets over a period of time. One such method of depreciation is the Diminishing Balance Method. Let us learn more about this method.

Diminishing Balance Method

According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset. As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method.

Since the book value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of the asset never reduces to zero.

When the amount of depreciation charged under this method and the corresponding period are plotted on a graph it results in a line moving downwards.

This method is based on the assumption that in the earlier years the cost of repairs to the assets is low and hence more amount of depreciation should be charged. Also, in the later years, the cost of repairs will increase and therefore less amount of depreciation shall be provided. Hence, this method results in an equal burden on the profit every year during the life of the asset.

However, under this method, if the rate of depreciation applied is not appropriate it may happen that at the end of the useful life of the asset full depreciation is not provided.

Also, while applying this method, the period of use of the asset should be considered. If an asset is used only for 2 months in a year then depreciation will be charged only for 2 months.

However, for the Income Tax purposes, if an asset is used for more than 180 days full years’ depreciation will be charged. Income Tax Rules also allow depreciation charged on Diminishing Balance Method.

Formulae are as follows:

$$ \text{Amount of depreciation} = \frac{ \text{Book Value} \times \text{Rate of Depreciation} }{100} $$

Browse more Topics under Concept And Accounting Of Depreciation

• Concept and Meaning of Depreciation
• Cost of Asset for Calculating Depreciation
• Straight Line Method
• Units of Production Method
• Annuity Method
• Sinking Fund Method
• Profit or Loss on Disposal of Asset
• Change in Method of Depreciation

Journal entry for Diminishing Balance Method of Depreciation

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Purchase of asset	Asset A/c	Dr.	xx
	To Cash/ Bank/ Creditor’s A/c			xx
	(Being asset purchased)
2. Charge Depreciation	Depreciation on Asset A/c	Dr.	xx
	To Asset A/c			xx
	(Being depreciation charged on book value of  asset)
3. Transfer Depreciation	Profit & Loss A/c	Dr.	xx
	To Depreciation on Asset A/c			xx
	(Being depreciation on asset transferred to profit and loss account)

Solved Example on Diminishing Balance method

Q. M/s. Bharat and sons purchased a machine on 1 Apr 2015 for ₹400000 from ABC & Co. and paid ₹100000 on its installation. The useful life of the machine is 3 years and its estimated residual value is ₹40000. On 31^st March 2018, M/s. Bharat and sons sell the machinery for 250000.

Charge depreciation as per the W.D.V. method @10 % p. a. Prepare the necessary ledger accounts in the books of Anil for the year ending 31^st December every year.

Ans: In the books of M/s. Bharat and sons

Machinery A/c

Date	Particulars	Amount		Date	Particulars	Amount
2015				2015
1 Apr	To ABC & Co. A/c	400000		31 Dec	By Depreciation A/c	37500
	To Cash A/c (installation exp.)	100000		31 Dec	By balance c/d	462500
		500000				500000
2016				2016
1 Jan	To balance b/d	462500		31 Dec	By Depreciation A/c	46250
				31 Dec	By balance c/d	416250
		462500				462500
2017				2017
1 Jan	To balance b/d	416250		31 Dec	By Depreciation A/c	41625
				31 Dec	By balance c/d	374625
		416250				416250
2018				2018
1 Jan	To balance b/d	374625		31Mar	By Depreciation A/c	9366
				31 Mar	By Cash A/c	250000
					By Profit & Loss A/c       ( loss on sale)	115259
		401625				401625

Depreciation A/c

Date	Particulars	Amount		Date	Particulars	Amount
2015				2015
31 Dec	To Machinery A/c	37500		31 Dec	By Profit & Loss A/c	37500
2016				2016
31 Dec	To Machinery A/c	46250		31 Dec	By Profit & Loss A/c	46250
2017				2017
31 Dec	To Machinery A/c	41625		31 Dec	By Profit & Loss A/c	41625
2018				2018
31 Mar	To Machinery A/c	9366		31 Dec	By Profit & Loss A/c	9366

Working Notes:

Calculation of amount of depreciation

$$ \text{Amount of depreciation} = \frac{ \text{Book Value} \times \text{Rate of Depreciation} }{100} $$

• 2015: Depreciation =  500000 x 10/100  x 9/12 =  37500
• 2016: Depreciation =  462500 x 10/100 = 46250
• 2017: Depreciation =  416250 x 10/100 = 41625
• 2018: Depreciation =   374625 x 10/100 x 3/12 =  9366

Calculation of loss on sale of machinery

Loss = Book Value on 1 Jan 2018 – depreciation for 3 months – cash received

=  374625 – 9366- 250000 = 115259