Here are the Definition of the Declining Balance Depreciation Method

kelolalaut.com The declining balance depreciation method is a fixed asset depreciation method that calculates depreciation as a fixed percentage of the asset’s book value each year. With this method, the depreciation expense is higher in the early years and gradually decreases over time. This method is suitable for assets that lose value more rapidly at the beginning of their use, such as vehicles, machinery, or technology equipment.

Formula for the Declining Balance Depreciation Method

Asset depreciation using the declining balance method is calculated using the following formula:

Depreciation for Year-n = Beginning Book Value×Depreciation Rate

Explanation:

• Beginning Book Value      : The asset’s value at the start of the current year.
• Depreciation Rate             : The percentage of depreciation determined based on company policy or accounting regulations.

In the double declining balance method, the depreciation rate is calculated as follows:

Depreciation Rate  =>  2x = (1 / Useful  Life)

Advantages and Disadvantages of the Declining Balance Method

Advantages:

• Suitable for assets that depreciate quickly

This method more realistically reflects the value reduction of assets that experience faster depreciation in the early years.

• Lower tax burden in the early years

Since depreciation expenses are higher in the first few years, companies can reduce taxable income earlier.

• Better reflects the economic value of assets

Higher depreciation at the beginning aligns with the more intensive use of the asset in its early years.

Disadvantages:

• Uneven depreciation expenses

Since depreciation is higher in the early years and decreases over time, this method can make long-term budgeting more challenging.

• Does not reach a fixed residual value

In some cases, depreciation may never reach the predetermined residual value, requiring adjustments in the final year.

Example Calculation

Suppose a company purchases a machine for Rp 100,000,000 with a useful life of 5 years and applies the declining balance method with a 40% depreciation rate.

Year 1:

Depreciation = 100,000,000×40% = 40,000,000

Book value at the end of year 1 = 100,000,000 - 40,000,000 = Rp 60,000,000

Year 2:

Depreciation = 60,000,000×40% = 24,000,000

Book value at the end of year 2 = 60,000,000 - 24,000,000 = Rp 36,000,000

And so on, until the asset’s value reaches its residual amount.

Conclusion

The declining balance depreciation method is an effective way to reflect higher asset usage in the early years. Despite its disadvantages in long-term financial planning, this method remains a preferred choice for companies with assets that depreciate quickly.

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