Declining Balance Method: Meaning, Depreciation Calculation, and Examples

This post was originally published on October 15th, 2024, and updated on March 3rd, 2025.

The Declining Balance Method calculates depreciation that diminishes an asset's value faster during its early years than over time. This approach applies a defined percentage of the asset's remaining value annually rather than distributing the cost evenly. It helps companies align spending with actual usage and obtain tax benefits. 

Key Takeaways:

• An accelerated depreciation method, the Declining Balance Method, adds a predetermined percentage annually to an asset's book value.
• This method often applies to assets that depreciate quickly and provides tax benefits by front-loading depreciation costs.
• A common type is the Double Declining Balance Method, which doubles the straight-line depreciation rate to accelerate depreciation further.

What is the Meaning of Depreciation?

Depreciation allocates a tangible asset's cost over its useful life. It shows how wear and tear, obsolescence, and other variables can cause an asset's value to decline over time. Most businesses use depreciation to align their expenses with earnings, ensuring proper financial reporting. Depreciation is also essential to tax deductions, enabling companies to account for asset devaluation while maintaining financial stability. 

Importance of Depreciation

Depreciation is essential to financial reporting and planning. It guarantees accurate financial statements by enabling companies to spread out the cost of assets throughout their useful lifespans. Depreciation also lowers tax obligations by reducing taxable income. Furthermore, it reasonably assesses the company's assets, facilitating improved financial forecasting and asset replacement projection. 

Types of Depreciation Methods

Accountants use several types of depreciation, depending on their financial strategy and the type of asset.

Straight-Line Depreciation

Straight-line depreciation allocates an asset's cost evenly over its useful life. This simple method is commonly applied to assets that deliver consistent benefits over time, such as office furniture and buildings. The formula for straight-line depreciation is (Cost - Salvage Value) ÷ Useful Life.

Declining Balance Depreciation

The declining balance depreciation method applies a fixed percentage to the asset's book value each year, resulting in higher depreciation expenses in the early years. Businesses prefer this method for assets that lose value quickly, such as vehicles and heavy machinery, as it provides tax advantages by frontloading expenses.

Double Declining Balance Depreciation

A variation of the declining balance method, this approach doubles the straight-line depreciation rate, allowing businesses to accelerate depreciation in the asset's early years. This method is beneficial when rapid depreciation is necessary for tax deductions or financial reporting purposes.

Units-of-Production Method

This method calculates depreciation using tangible assets instead of time. It is helpful for assets like machinery or automobiles, where the production level influences wear and tear. Depreciation is determined using the total expected output over the asset's lifespan.

How Do You Use the Declining Balance Method?

The declining balance method is used primarily for tax advantages and asset valuation strategies. Businesses apply this method to:

• Accelerate expense recognition for tax benefits.
• Reflect the actual wear and tear of rapidly depreciating assets.
• Align accounting practices with industry standards and regulations.

By carefully implementing this method, companies can maximize their financial planning while adhering to accounting requirements. It is best to study accounting theory to help you better understand the principles and frameworks that guide the practice of accounting.

Declining Balance Method Examples

The Declining Balance Method is useful but can also be challenging to implement. Here are some common declining balance method problems and solutions: 

Problem: High depreciation in the early years.

Certain businesses' inability to handle the high depreciation expense may impact profitability in the first few years.

Solution: Businesses can plan financial projections accordingly or opt for alternative methods like the Straight-Line Method for assets with consistent usage.

Problem: The residual value is reaching zero too soon. 

This method steadily reduces the amount of depreciation, but it never reaches zero because it applies a percentage to the book value.

Solution: Companies set a salvage value limit to prevent over-depreciation and ensure accurate financial statements.

Problem: Not suited for all assets.

Assets that provide steady utility over time, like office buildings or land improvements, may not benefit from accelerated depreciation. 

Solution: The straight-line or unit production methods may be better suited for such assets.

Businesses can effectively leverage the declining balance method by addressing these challenges while maintaining accurate financial reporting.

How Do I Calculate Depreciation Using the Declining Balance Method?

The Declining Balance Method calculates depreciation by applying a fixed percentage to an asset’s book value at the start of each year. This results in higher depreciation expenses in the earlier years and gradually lower amounts as the asset ages.

Formula:

Depreciation Expense = Book Value at Beginning of Year × Depreciation Rate

Terminology:

• Book Value at Beginning of Year: the value of an asset before depreciation within a year.
• Depreciation Rate: the fixed percentage to calculate depreciation.

How to calculate:

1. Determine the initial cost and useful life of the asset.
2. Choose an appropriate depreciation rate based on accounting guidelines.
3. Multiply the asset’s book value by the depreciation rate each year.
4. Subtract the depreciation expense from the book value to get the new value.
5. Repeat until the asset reaches its salvage value (estimated residual worth).

Example calculation:

A company buys equipment that costs $10,000 and has a 5-year useful life. They apply a 30% depreciation rate using the Declining Balance Method.

Year 1: $10,000 × 30% = $3,000 ▶️ New book value: $7,000

Year 2: $7,000 × 30% = $2,100 ▶️ New book value: $4,900

Year 3: $4,900 × 30% = $1,470 ▶️ New book value: $3,430

This procedure continues until the asset's worth equals its salvage value. Many companies use depreciation calculators like the one from Calculator.Net to make these computations easier and guarantee accurate financial reporting.