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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

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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.

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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:

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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 assetAmount 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: – 

DateParticularsL.F. Debit Credit
1st Year
2016-17      
01-AprMachinery A/cDr.  13,00,000 
  To Bank A/c    13,00,000
 (Being land purchased on lease )   
 
31-MarDepreciation A/cDr. 1,30,000 
  To Machinery A/c   1,30,000
 (Being Depreciation on asset charged)   
 
31-MarProfit or loss A/cDr. 1,30,000 
  To Depreciation A/c   1,30,000
 (Being Depreciation transfer to P&L A/c)   
 
2nd Year
2017-18      
31-MarDepreciation A/cDr. 1,17,000 
  To Machinery A/c   1,17,000
 (Being Depreciation on asset charged)   
 
31-MarProfit or loss A/cDr. 1,17,000 
  To Depreciation A/c   1,17,000
 (Being Depreciation transfer to P&L A/c)   
 
Subsequent Years
2017-18      
31-MarDepreciation A/cDr. _______ 
  To Machinery A/c   _______
 (Being Depreciation on asset charged)   
 
31-MarProfit or loss A/cDr. _______ 
  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
DateParticularsAmountDateParticularsAmount
01-04-2017To Bank A/c11,00,00031-03-2018By Depreciation A/c1,30,000
01-04-2017To Bank A/c1,50,00031-03-2018By Balance C/d11,70,000
(Transportation)(Balancing Fig)
01-04-2017To Bank A/c50,000   
(Installation)
  13,00,000  13,00,000
 
01-04-2018To Balance B/d11,70,00031-03-2019By Depreciation A/c1,17,000
   31-03-2019By Balance C/d10,53,000
(Balancing Fig)
  11,70,000  11,70,000
 
01-04-2019To Balance B/d10,53,00031-03-2020By Depreciation A/c1,05,300
   31-03-2020By Balance C/d9,47,700
(Balancing Fig)
  10,53,000  10,53,000
 
01-04-2020To Balance B/d9,47,70031-03-2021By Depreciation A/c94,770
   31-03-2021By Balance C/d8,52,930
(Balancing Fig)
  9,47,700  9,47,700
 
01-04-2020To Balance B/d8,52,93031-03-2021By Depreciation A/c85,293
   31-03-2021By Balance C/d7,67,637
(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

Thanks for reading the topic of the Diminishing Balance Method of Depreciation, please comment with your feedback whatever you want.

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