decliningbalance

Declining balance is an accelerated depreciation method used in accounting to allocate the cost of a tangible asset over its useful life. The depreciation expense in each period is calculated as a fixed percentage of the asset’s beginning-of-period book value, so earlier years show larger charges than later years. The rate is tied to the asset’s useful life; common variants include the double-declining balance (DDB), which uses twice the straight-line rate, and the 150% declining balance, which uses 1.5 times the straight-line rate. Unlike straight-line depreciation, the annual expense is based on book value, with the book value constrained not to fall below the asset’s salvage value.

Calculation and application follows a straightforward pattern. Let cost be C, salvage value S, and useful life n. The depreciation rate r is typically 2/n for DDB or 1.5/n for 150% declining balance. For each year, depreciation = min(starting book value × r, starting book value − S). The new book value becomes starting book value minus depreciation. This process repeats until the book value reaches the salvage value or the end of the asset’s useful life.

Standards and considerations vary by framework. Under IFRS and US GAAP, the method should reflect the pattern of economic consumption and may be accelerated, but estimates of useful life and residual value influence the calculation. Tax regimes often permit or mandate specific depreciation methods and may require switching to straight-line as the asset ages to avoid excessive front-loading.

Example: cost 10,000, life 5 years, 200% declining balance (r = 0.4). Year 1 depreciation = 4,000; end BV = 6,000. Year 2 depreciation = 2,400; end BV = 3,600. Year 3 depreciation = 1,440; end BV = 2,160. Year 4 depreciation = 864; end BV = 1,296. Year 5 depreciation = 518.4; end BV approaches salvage value.