What is diminishing balance method

Question

Accepted Answer

Diminishing balance method is a depreciation method that charges a higher rate of depreciation in the early years of an asset's life.

Also known as reducing balance method
Depreciation rate is applied to the remaining book value of the asset
Results in higher depreciation expense in early years and lower in later years
Example: A company buys a machine for $10,000 with a useful life of 5 years and a salvage value of $1,000. Using 20% depreciation rate, the depreciation expense in year 1 would be $2,000 (20% of $10,000), and the book value at the end of year 1 would be $8,000 ($10,000 - $2,000). In year 2, the depreciation expense would be $1,600 (20% of $8,000), and so on.

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