Declining balance is a form of accelerated depreciation that will depreciate more aggressively than the straight line method. This method is appropriate when an asset has higher functionality in the early years of use and becomes obsolete quickly. Declining or reducing balance methods ensure that more depreciation is accounted for in the first few years. Fixed assets like computer equipment are a good example since they are typically only used for a couple of years and then replaced.
Here is a spreadsheet showing the basic math behind a declining balance formula:
In the example, there are 3 basic values needed to complete the calculation:
- Cost – the purchase price of the asset
- Method – 200% represents a double declining balance
- Years – number of years the asset will be in service
This example uses 10 years to keep the calculated numbers nice and clean but most equipment under declining balance would typically be depreciated over 3, 5 or 7 years. The spreadsheet formula in cell A7 shows one divided by the number of years to determine the straight line percentage. This value is then multiplied by a factor (declining balance percentage i.e. 125, 150, 175, 200 divided by 100) to calculate a depreciation rate. This rate is then multiplied by the remaining balance, which in the first year is the initial cost.
To continue this calculation you could enter (C4-C8)*C7 in cell C9 to calculate the second year. This formula is very similar to the one in C8 except now it calculates with the remaining balance (cost minus prior depreciation) and uses that value in place of cost. You could then continue this formula for each remaining year until the calculated annual number is less than the straight line amount, at that point and forward you can use the straight line amount until the asset is fully depreciated.
A straight line method will evenly spread the cost of an asset over its entire life while a declining balance method will result in a declining depreciation charge each year. As you can see, this calculation is much more complicated even for just a single asset record. These formulas can get very confusing when you are tracking a larger number of assets.
Let the Depre123 depreciation calculator take out the guess work. Just enter 3 simple values (Cost, Date, Class) and get all the answers. The calculator is a great way to view the depreciation results for a handful of assets. If you manage hundreds or thousands of fixed asset records then a trial of the full Depre123 application can demonstrate how to simplify the entire process of fixed asset management.
Questions? Comments? Let us know in the comments section below.
More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.