The Declining Balance Method is a depreciation method used to calculate the depreciation expense of an asset over its useful life. It is a type of accelerated depreciation method where the depreciation expense is higher in the early years and decreases over time.
Formula:
The formula for the declining balance method is as follows:
Depreciation Expense = (Cost of Asset - Accumulated Depreciation) * Depreciation Rate
Where:
Cost of Asset = the original cost of the asset
Accumulated Depreciation = the total amount of depreciation expense taken so far
Depreciation Rate = a percentage that represents the rate at which the asset is depreciated, usually double the straight-line depreciation rate
Examples: Let's assume a company purchased an asset for $100,000 with a useful life of 10 years and a double declining rate of 20%.
Year 1: Depreciation Expense = ($100,000 - $0) * 20% = $20,000
Year 2: Depreciation Expense = ($100,000 - $20,000) * 20% = $16,000
Year 3: Depreciation Expense = ($100,000 - $36,000) * 20% = $12,800
And so on, until the asset reaches its end of life and has fully depreciated.
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