Declining Balance Method of Depreciation
DECLINING BALANCE METHOD OF DEPRECIATION
In
this method of depreciation, a fixed sum is charged as the depreciation amount
throughout the lifetime of an asset such that the accumulated sum at the end of
the life of the asset is exactly equal to the purchase value of the asset.
Here,
we make an important assumption that inflation is absent.
Let
P = first cost of the asset,
F = salvage value of the asset
n = life of the asset,
Bt
= book value of the asset at the end of the period t,
Dt = depreciation amount for the period
t.
The formulae for depreciation and book value are as follows:
Dt = K * Bt–1
Bt
= Bt–1 –
Dt =
Bt–1 –
(K * Bt–1) = (1-K) * Bt–1
The
formulae for depreciation and book value in terms of P are as follows:
Dt = K * (1-K)t–1 * P
Bt = (1-K)t * P