Declining Balance Method

What Is the Declining Balance Method?

The declining balance method is a way of allocating the cost of a long-lived asset, such as machinery, equipment, or a vehicle, across its useful life. Rather than spreading the cost evenly, it records a larger share of depreciation expense in the early years and a smaller share later. It is one form of accelerated depreciation, which reflects the idea that many assets lose the most value soon after they enter service.

How It Works

Each year, the method multiplies the asset's book value at the start of the year by a fixed rate. That rate is usually set as a multiple of the rate used in straight-line depreciation. A common version, the double-declining balance approach, uses twice the straight-line rate. Because the percentage is applied to a smaller remaining balance each year, the dollar amount of depreciation shrinks over time.

Annual Depreciation = Book Value at Start of Year × Depreciation Rate

Many businesses switch to straight-line depreciation later in an asset's life so that it is fully written down to its salvage value by the end of its useful life.

Example

Suppose a business buys a machine for $10,000 with a five-year useful life and no salvage value. Under straight-line depreciation, the annual charge would be 20% of cost, or $2,000. Under the double-declining balance approach, the rate is 40%:

• Year 1: $10,000 × 40% = $4,000 of depreciation, leaving a book value of $6,000
• Year 2: $6,000 × 40% = $2,400 of depreciation, leaving $3,600
• Year 3: $3,600 × 40% = $1,440 of depreciation, leaving $2,160

The early charges are larger than the straight-line amount, and they shrink each year.

Advantages and Disadvantages

The method can match expense more closely to an asset that is most productive when new, and it lowers reported profit in the early years. Its main drawbacks are added complexity, since the rate and remaining balance must be tracked each year, and the fact that the balance never reaches zero on its own, so a switch to another method is usually needed. Reported profits may also rise in later years as depreciation falls. Investors comparing companies should check which depreciation method each one uses, because the choice affects reported earnings and asset values without changing the cash actually spent.