What is the decreasing depreciation of balance?

Reducing the balance of the balance is the method of measurement of the depreciation value of the asset that is based on the level of asset depreciation. It uses depreciation rate throughout the life of the asset until the value reaches the rescue value. This differs from the depreciation method in which the depreciation amount extends evenly throughout the life of the asset. On the other hand, the method of depreciation of the decreasing balance continues to apply the level of depreciation to the balance of the asset value, which means that the amount of depreciation decreases every year. If the company files a tax return, the values ​​of depreciation of its assets must be considered. For example, a five -year -old computer will not be the same as new. Balance depreciation method is often used because companies often calculate the cost of asset when it is new and therefore prefers extension to decline as years run.

For example, imagine that an asset worth $ 500 (USD) is expected to depreciate rate 5 each year0 percent. The use of decreasing depreciation balance This means that the value of this asset would depreciate by 50 percent of $ 500, ie $ 250, which means that its value two per year would be $ 250, or $ 500 minus $ 250. In the second year, the balance of $ 250 would then be depreciated by 50 percent, which would take another $ 125 from this value. This process would continue until the value reached the predetermined asset rescue value.

Although it differs from the direct line method, in which the asset is written off each year with the same amount, in conjunction with this method, the declining depreciation of balance is often used. This technique creates what is called the depreciation of double decreasing balance. In this method, the direct line method is used to determine the degree of depreciation, which then doubles to provide the rate for the method of decreasing balance.

As an example, an asset with a $ 500 with a life length of five years would depreciate $ 100 each year using a direct method. ItIt means that the asset depreciates 20 percent per year because $ 100 is $ 500 from $ 500. For the use of a double descent method, this 20 percent doubles to increase the depreciation rate of 40 percent. This rate is then involved in the decreasing balance method to determine the amount of depreciation every year.