# Declining Balance Method Definition

### What is the declining balance method?

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

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### How to calculate declining balance depreciation

Depreciation using the declining balance method is calculated as follows:

The

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

TheDecreasing amortization of the balance=VSBV×reRor:VSBV=current book valuereR=depreciation rate (%)TheThe

The current book value is the net asset value at the start of an accounting period, calculated by deducting the accumulated depreciation from the cost of the asset. The residual value is the estimated recovery value at the end of the useful life of the asset. And the depreciation rate is defined according to the estimated pattern of use of an asset over its lifetime.

### Assumptions underlying the chosen depreciation method

Investors should carefully review the footnotes to the financial statements, where the assumptions underlying the choice of depreciation method are sometimes discussed. Assumptions regarding the useful life of an asset, the salvage value and the depreciation rate can have a significant impact on net income.

Changing the expected life of an asset or the depreciation rate can flatter reported income and the balance sheet, reducing depreciation expense and the rate at which the carrying value of assets decreases. Likewise, an overestimation of salvage value can make income more attractive than it actually is.

### The difference between declining balance and the double decrease method

If a business often recognizes significant gains in asset sales, this could be a sign that the business is using accelerated depreciation methods, such as the double declining balance depreciation method.

The net profit will be lower for several years, but since the book value ends up being lower than the market value, there is a greater gain when the asset is sold. If this asset is still valuable, its sale could give a misleading picture of the underlying health of the business. However, SOEs tend to avoid accelerated depreciation methods – even if accelerated depreciation results in deferred tax obligations – because net income is reduced in the short term.