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That method has been developed to remove the short comings of straight line method. Equal amount of depreciation is charged every year under straight line method. The method is criticized for showing disfavor to final years of the life of the assets. During final years repairs and maintenance charges are more but the depreciation is the same? It shows that the final years are overburdened with charges. Diminishing balance method was developed to remedy the weakness of straight line method.

 

Under the diminishing balance method, the value of asset upon which depreciation is to be calculated goes on diminishing, so the amount of depreciation to be charged every year also goes on declining. For example, if a machine has been acquired for $ 1,00,000 and depreciation is charged @ 10% according to written down value method the depreciation to be charged will be made as under :

 

 

1st year on $  100,000 @ 10% =10/100 x 1 ,00,000 = $ 1 0,000

2nd year on $ 90,000,i.e., $ 1,00,000- 10,000 = 90,000 x  10/100 = $. 9,000

3rd year on $ 81,000, i.e., $. 90,000 – 9,000 = 81,000 x 10/100 = $ 8,100

4th year on $ 72,900, i.e., $ 81,000-8,100 = 72,900 x10/ 100 = $ 7,290.

 

and so on.

 

It will be observed from the above calculation that the balance of machine upon which depreciation is being calculated goes on diminishing or reducing or it is being written down. It should also be noted that the amount of depreciation goes on declining year after year. In the first year it was $ 10,000. in the second year, it came down to $ 9,000. It reduced further to $ 8,100 in the third year. In the 4th year, it remained, only $ 7,290. In this way, depreciation will go on declining year after year.