What is a method of declining balance?

The decreasing balance method is a way to measure the loss of a fixed asset, such as a piece of device. Specifically, it is a common method of measuring the loss of the value of heavy machines. The method of decreasing balance is one of the most popular options for determining depreciation.

The company must monitor the loss of the value of assets for many reasons. One of the greatest reasons is that investors and creditors require the company's accurate account before investing. Without a method of decreasing balance or some other methods of evaluation of lost value, the company cannot provide this exact image. Depreciation costs are generally listed in the company's earnings statement. The raw materials in the machine or other item are usually worth something, even if the rescue, so almost nothing built to endure, will completely destroy completely. The troop between the acquisition price and the rescue price is the overall potential depreciation. If the machine costs $ 11,000 (USD) new and has a $ 1,000 life at the end of its lifetimeThe depreciation of his life would be $ 10,000.

Direct calculation of depreciation is probably the simplest method and perhaps more used than the method of decreasing balance. However, this method is not always the most accurate. It calculates depreciation based on the overall depreciation potential, divided by the expected lifetime. This fixed number is then deducted from the beginning of the book of the year to provide depreciation costs.

The

method of declining equilibrium takes into account that the first year of life of the item is often a year that loses the greatest value. This rate is determined by taking over the number of 100 and dividing the Number for the expected number of years. If the machine has a lifetime of 20 years, this number would be 5 because it depreciates 5 percent for 20 years each year.

This percentage is then taken from the accounting value every year. For example, if there is a piece of equipment with a total depreciation of $ 10,000, 5 percent would be removed every yearWell. After the first year, depreciation would cause an asset worth $ 9,500. At the end of the second year it would be $ 9,025 and so on.

The decreasing balance method can also be slightly tuned into something called a double -decreasing balance. Using a previous example, instead of depreciation by 5 percent each year, the asset would be exposed to 10 % of the depreciation level. Some say it is an even more accurate image of depreciation, but it may depend on the piece or machine.