## What Is the Declining Balance Method?

The declining balance method, also known as the reducing balance method, is an accelerated depreciation method that records larger depreciation expenses during the earlier years of an asset’s useful life, and smaller ones in later years.

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## How to Calculate Declining Balance Depreciation

Depreciation under the declining balance method is calculated as follows:

﻿\begin{aligned} &\text{Declining Balance Depreciation} = CBV \times DR\\ &\textbf{where:}\\ &CBV=\text{current book value}\\ &DR=\text{depreciation rate (\%)}\\ \end{aligned}﻿

Current book value is the asset's net value at the start of an accounting period, calculated by deducting the accumulated depreciation from the cost of the fixed asset. Residual value is the estimated salvage value at the end of the useful life of the asset. And the rate of depreciation is defined according to the estimated pattern of an asset's use over its useful life.

## Assumptions Underlying the Chosen Depreciation Method

Investors should look carefully at the footnotes in the financial statements, where the assumptions underlying the choice of depreciation method are sometimes discussed. Assumptions regarding the useful life of an asset, salvage value and the rate of depreciation can have a big impact on the bottom line.

Changing the expected life of an asset or rate of depreciation can flatter reported income and the balance sheet, by reducing depreciation expenses and the rate at which the book value of assets decline. Similarly, overestimating salvage value can make earnings look better than they really are.

## The Difference Between Declining Depreciation and the Double-Declining Method

If a company often recognizes large gains on sales of assets, it might be a sign that the company is using accelerated depreciation methods, like the double-declining balance depreciation method.

Net income will be lower for a number of years, but because book value ends up being lower than market value, there is a bigger gain when the asset is sold. If this asset is still a valuable one, its sale could give a misleading picture of the company's underlying health. However, public companies tend to shy away from accelerated depreciation methods—even though accelerated depreciation results in a deferment of taxation liabilities—as net income is reduced in the short-term.