What is the decreasing balance of balance?
Reducing the balance of balance is an accounting tool that allows the companies to reduce the accounting value of fixed assets. Fixed assets are considered to be long -term assets to help companies to achieve goals for the sale of goods and services to consumers. Fixed assets such as equipment and machinery should eventually be replaced to depreciate for the life of the item. The purpose of the method of decreasing balance is to use the percentage of depreciation every year so that the company can accurately calculate the value of the asset at a certain time. For example, a machine that creates widgets can have a lifetime for 10 years. At the end of this period, the company can sell an asset for the amount based on the price of the same or similar machines available for sale, which is also 10 years.
The percentage of annual depreciation in the depreciation method of decreasing balance is based on the estimated team for administration and accounting company. HearsMCO for this calculation will be different methods, the basic method is 100 percent divided years of life. The theory of this method is that the machine has 100 % capacity before installation. Once the asset is used, it will most likely depreciate as long as the use is consistent. For example, a 10 -year -old machine would depreciate 10 percent every year.
Accountants can usually find out how to reduce the balance of balance quite easily as soon as the basic pieces are in place. For example, if the machine costs $ 150,000, it has a 20 -year lifetime and a value of zero rescue, accountants would start a decisive percentage of depreciation to five percent (100/20). In order to determine the annual amount of the dollar depreciation for the machine, the accounting will multiply the annual percentage of the depreciation. Therefore, the annual depreciation per year on the machine is 7,500 USD, while the modified book values of the machine to $ 142,500. For the second year, the annual depreciation of the dollar is $ 7,125 (142 500 x 0.05). It continues untilThe asset will not reach the value of zero rescue in the company's books.
The result of depreciation of the decreasing balance is quite obvious. The annual depreciation slowly decreases every year, reflecting the lower value of assets from depreciation in previous years. Theoretically, the accountant believes that it represents a more accurate picture of the depreciable value of the asset.