Diminishing Balance Method of Depreciation | Example

Posted by By Amanpreet Kaur 9 Min Read February 26, 2022
Diminishing Balance Method Depreciation Feature image
Diminishing Balance Method Depreciation Feature image

As we have already discussed the meaning of depreciation in the previous article now in this article we will explain to you the second method of calculating the amount of depreciation named the Diminishing Balance Method of Depreciation.

What is Diminishing Balance Method of Depreciation:

In Diminishing Balance method of Depreciation, we have calculated the depreciation on the closing value of an asset and charge until the book value of an asset will equal to its scrap value. The amount of depreciation will be diminished or decreased as compared to last year because we charge the fixed rate of depreciation on the closing value of an asset. It is also called written down value and reducing value method. This method is suitable for tangible assets like Building, plant & machinery and furniture & fixture etc.

Formula of Depreciation: –

The Depreciation can be calculated under this method with the help of following formula:

Diminishing Balance

Total Cost of an asset includes money spent on the purchase of it and to convert it into working condition like installation charges, transportation charges, and first time oiling etc. 

Example of Diminishing Balance Method of Depreciation:

On 01/04/2017 Machinery purchased for Rs 11,00,000/- and paid for transportation charge 1,50,000/- to install the machine in our plant and paid installation charges also for Rs 50,000/-. The rate of Depreciation @ 10% Year ending 31 March.

So, Total Cost of an asset  = 11,00,000+1,50,000+50,000 

      = Rs 13,00,000/- 

The following table shows the year by year depreciation charged under Diminishing Balance Method.

Year ended  Opening balance of an asset Amount of depreciation  The closing balance of an asset
31-03-2017  13,00,000             1,30,000  11,70,000
31-03-2018  11,70,000             1,17,000  10,53,000
31-03-2019  10,53,000             1,05,300     9,47,700
31-03-2020     9,47,700                94,770     8,52,930
31-03-2021     8,52,930                85,293     7,67,637
31-03-2022     7,67,637                76,764     6,90,873
31-03-2023     6,90,873                69,087     6,21,786
31-03-2024     6,21,786                62,179     5,59,607
31-03-2025     5,59,607                55,961     5,03,647
31-03-2026     5,03,647                50,365     4,53,282
31-03-2027     4,53,282                45,328     4,07,954
31-03-2028     4,07,954                40,795     3,67,158
31-03-2029     3,67,158                36,716     3,30,443
31-03-2030     3,30,443                33,044     2,97,398
31-03-2031     2,97,398                29,740     2,67,658
31-03-2032     2,67,658                26,766     2,40,893
31-03-2033     2,40,893                24,089     2,16,803
31-03-2034     2,16,803                21,680     1,95,123
31-03-2035     1,95,123                19,512     1,75,611
31-03-2036     1,75,611                17,561     1,58,050
31-03-2037     1,58,050                15,805     1,42,245
31-03-2038     1,42,245                14,224     1,28,020
31-03-2039     1,28,020                12,802     1,15,218
31-03-2040     1,15,218                11,522     1,03,696
31-03-2041     1,03,696                10,370         93,327

Now, we will post all the journal entries year by year as follows: – 

Date Particulars L.F.  Debit  Credit
1st Year
2016-17            
01-Apr Machinery A/c Dr.    13,00,000  
    To Bank A/c        13,00,000
  (Being land purchased on lease )      
 
31-Mar Depreciation A/c Dr.   1,30,000  
    To Machinery A/c       1,30,000
  (Being Depreciation on asset charged)      
 
31-Mar Profit or loss A/c Dr.   1,30,000  
    To Depreciation A/c       1,30,000
  (Being Depreciation transfer to P&L A/c)      
 
2nd Year
2017-18            
31-Mar Depreciation A/c Dr.   1,17,000  
    To Machinery A/c       1,17,000
  (Being Depreciation on asset charged)      
 
31-Mar Profit or loss A/c Dr.   1,17,000  
    To Depreciation A/c       1,17,000
  (Being Depreciation transfer to P&L A/c)      
 
Subsequent Years
2017-18            
31-Mar Depreciation A/c Dr.   _______  
    To Machinery A/c       _______
  (Being Depreciation on asset charged)      
 
31-Mar Profit or loss A/c Dr.   _______  
    To Depreciation A/c       _______
  (Being Depreciation transfer to P&L A/c)      
             
Note: –  Journal Entries will be the same for all subsequent years but the only amount of depreciation will be changed as calculated in the above table
Machinery Account
Date Particulars Amount Date Particulars Amount
01-04-2017 To Bank A/c 11,00,000 31-03-2018 By Depreciation A/c 1,30,000
01-04-2017 To Bank A/c 1,50,000 31-03-2018 By Balance C/d 11,70,000
(Transportation) (Balancing Fig)
01-04-2017 To Bank A/c 50,000      
(Installation)
    13,00,000     13,00,000
 
01-04-2018 To Balance B/d 11,70,000 31-03-2019 By Depreciation A/c 1,17,000
      31-03-2019 By Balance C/d 10,53,000
(Balancing Fig)
    11,70,000     11,70,000
 
01-04-2019 To Balance B/d 10,53,000 31-03-2020 By Depreciation A/c 1,05,300
      31-03-2020 By Balance C/d 9,47,700
(Balancing Fig)
    10,53,000     10,53,000
 
01-04-2020 To Balance B/d 9,47,700 31-03-2021 By Depreciation A/c 94,770
      31-03-2021 By Balance C/d 8,52,930
(Balancing Fig)
    9,47,700     9,47,700
 
01-04-2020 To Balance B/d 8,52,930 31-03-2021 By Depreciation A/c 85,293
      31-03-2021 By Balance C/d 7,67,637
(Balancing Fig)
    8,52,930     8,52,930
same entries will be posted till the value of asset become zero or equal to scrap value

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