DIMINISHING BALANCE/WRITTEN DOWN VALUE METHOD - Accounts and Finance for Managers

This method also having the same methodology in charging depreciation on the fixed assets like fixed percentage Though it is bearing similar approach in charging depreciation but different in application from the straight line method. Under this method, the depreciation is charged on the value of the asset available at the beginning of the year.
The following formula highlights the application of this method in charging depreciation
1-(S/C)1/n

The meaning of the above illustrated formulae is discussed through the explanation of two different components.
First one is (S/C)1/n , the ration of the scrap value of the asset on the original value of the asset is appropriately apportioned throughout the life period of the assets. It is nothing but the percentage of scrap value widened across the life period of the asset. Once the scrap value percentage is known, the next important step is to determine the depreciable value of the asset. The depreciable value of the asset can be derived by deducting the percentage from No 1.

Illustration 5

Life of the asset (n)=3 years
Expected scrap value at the end of 3 years= Rs. 12,800
Original Investment=Rs. 2,00,000
Find out the percentage of depreciation to be charged
Under this method, to charge depreciation as well as to find out the value of the asset as on a particular date, the depreciation percentage must be given. In this problem, depreciation % is not given, in order to determine the above illustrated formulae should be applied
=1-(S/C)1/n
=1-(Rs. 12, 800/Rs. 2, 00, 000)(1/3)
=1-4/10=6/10=60%

The following workings will obviously facilitate to understand the charge of depreciation
Diminishing-balance-written

Diminishing-balance


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