## What is a 'Declining Balance Method'

A declining balance method is a common depreciation-calculation system that involves applying the depreciation rate against the non-depreciated balance. Instead of spreading the cost of the asset evenly over its life, this system expenses the asset at a constant rate, which results in declining depreciation charges each successive period. For example, if an asset that costs \$1,000 is depreciated at 25% each year, the deduction is \$250.00 in the first year, \$187.50 in the second year, and so on.

Next Up

## BREAKING DOWN 'Declining Balance Method'

Depreciation is an accounting convention that attempts to better match expenses to the revenues they produce. That is, accountants want to make sure that the assets purchased today are expensed as they are used, rather than only on the day of purchase. Some expenses, such as office supplies and inventory, are expensed in the year they are purchased because they are used in the same year. Other items, such as a truck, can provide value for more than one year. These assets are referred to as capitalized assets and capitalized assets are treated differently on the balance sheet and income statement. Capitalized assets are not fully expensed in the purchase year, they are depreciated over the life of the asset. One depreciation method used to estimate the amount to depreciate each year is referred to as the declining balance method.

## Straight-Line Method

Accountants generally base the declining balance method on the straight-line method. Under the straight-line method the accountant estimates depreciation expense by subtracting the salvage value from the cost of the asset and then dividing by the useful life of the asset. The salvage value is the value of the asset after its useful life, which may also be the scrap value. The cost of the asset is the cost to purchase, and the useful life is the expected life expectancy of the asset, which is generally provided by the manufacturer. If a company purchases a truck for \$15,000 with a salvage value of \$5,000 and a useful life of five years, the annual straight-line depreciation expense is equal to \$15,000 minus \$5,000 divided by five, or 20% of \$10,000.

## Declining Balance Method

The declining balance method doubles the depreciation rates. For example, instead of only depreciating 20% of the book value of the asset, the company expenses 40%. As the asset's book value decreases, so does the depreciation expense until the asset is fully written off. Accountants using this method to depreciate a truck believe the truck is more productive in the beginning of its useful life than the end, and therefore more of the truck's value is depreciated in the beginning of the asset's life under an accelerated or declining balance method.

RELATED TERMS
1. ### Double Declining Balance Depreciation ...

The double declining balance depreciation method is an accelerated ...
2. ### Retirement Method of Depreciation ...

Retirement method of depreciation describes the accounting practice ...
3. ### Sum-Of-The-Years' Digits

An accelerated method for calculating an asset's depreciation. ...
4. ### Depreciated Cost

Depreciated cost is the original cost of a fixed asset less accumulated ...
5. ### Carrying Value

An accounting measure of value, where the value of an asset or ...
6. ### Depreciable Property

Depreciable property is any type of asset that is eligible for ...
Related Articles
1. Investing

### Depreciation: Straight-Line Vs. Double-Declining Methods

Appreciate the different methods used to describe how book value is "used up".
2. Taxes

### Recoverable Depreciation: How it Works

Recoverable depreciation is a concept used in many insurance policies and claims.
3. Investing

### How rental property depreciation works

Rental property can prove to be a great investment. It's a bit tricky, but rental property depreciation can be a valuable tool to make your investment pay off.
4. Investing

### How Depreciation Works on a Rental Property

One of the advantages of owning rental real estate is the depreciation tax deduction.
5. Personal Finance

### Consumer Products That Depreciate The Most (And Least)

Your new car may not hold its value as well as that old collectible toy you kept in perfect condition. Find out which purchases will still be worth something in the years to come.
6. Personal Finance

### Cars That Depreciate The Least

Here are some of the top vehicles to buy if you're looking to keep the residual value of the vehicle high after a number of years.
7. Investing

### Reading the Balance Sheet

Learn about the components of the statement of financial position and how they relate to each other.
8. Investing

### EBITDA

Otherwise known as Earnings Before Interest, Taxes, Depreciation and Amortization. Learn more about this indicator of a company's financial performance.
9. Insurance

### What Is the Best Age to Get Life Insurance?

Learn about the optimal time for purchasing personal life insurance and why delaying the buying decision may have costly consequences.
10. Investing

### How to Evaluate a Company's Balance Sheet

Asset performance shows how what a company owes and owns affects its investment quality.
RELATED FAQS
1. ### When should I use depreciation expense instead of accumulated depreciation?

Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ... Read Answer >>
2. ### Depreciation Can Shield Taxes, Bolster Cash Flow

Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow Read Answer >>
3. ### Why is it that under some circumstances, capital expenditure cannot be tax-deducted ...

Understand the meaning of capital expenditures, and learn what the implications are for companies resulting from tax laws ... Read Answer >>
4. ### Which consumer goods do Americans buy the most of?

Explore the various factors that influence estimations of a tangible asset's useful life, as well as standard estimations ... Read Answer >>
Hot Definitions
1. ### Inflation

Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
2. ### Discount Rate

Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
3. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
4. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
5. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
6. ### Financial Risk

Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...