Explain about Diminishing balance method in depreciation.

Finance ManagementAccountingAcademic Content

In diminishing balance method, depreciation is calculated on book value of the asset at the start of the year instead of principle amount with fixed percentage. In this, the percentage is same but depreciation amount gradually decreases as it is done on book value.

Formula

Depreciation amount = (book value * rate of depreciation)/100

Some of the merits of diminishing balance method are as follows −

  • Recognised by income tax authorities.
  • Minimises impact of obsolescence.
  • Depreciation amount decreases year by year.
  • Suitable for assets where scrap value equals to zero.

Some of the demerits of diminishing balance method are as follows −

  • Asset value can be zero.
  • Interest is not considered.
  • Calculation of profit/loss is complicated.
  • Emphasis on historical cost.

Journal entry

Year 1

DateParticulars
DebitCredit
XX-XX-XXXXMachinery A/cDr.$$$$$$

To Bank (Being land purchased on lease)

$$$$$$
XX-XX-XXXXDepreciation A/CDr.$$$$

To machinery (being depreciation on asset charged)

$$$$





XX-XX-XXXXProfit or loss A/CDr$$$$$$

To depreciation A/C (Being depreciation transfer to P&L A/c)

$$$$$$

On subsequent years

XX-XX-XXXXDepreciation A/CDr.$$$$

To machinery (being depreciation on asset charged)

$$$$





XX-XX-XXXXProfit or loss A/CDr$$$$$$

To depreciation A/C (Being depreciation transfer to P&L A/c)

$$$$$$
raja
Published on 13-Aug-2020 14:39:55
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