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Depreciation | Written Dawn Value | Diminishing Balance Method

Arjun EP

Published on: April 29, 2021

Diminishing Balance Method or Written Dawn Value

Diminishing balance method is also known as written dawn value, reducing balance method, residual balance method and declining balance method.

Under this method, depreciation is charged in diminishing balance or book value of each year.

Depreciation is calculated on either percentage basis or life of asset basis.

There are two methods for accounting treatment.

One is without opening provision for depreciation account and other with opening provision for depreciation account.

Advantages of diminishing balance method

The main advantages of diminishing balance method are following:

· Depreciation is charged always on opening balance of assets.

· The amount of depreciation is decreased year by year.

· Under this method, the book value of assets never becomes zero.

· Tax department approves this method.

· No need to make separate calculation for additional assets, if depreciation rate is same.

Disadvantages of diminishing balance method

The main disadvantages of diminishing balance method are following:

· It is difficult to fix depreciation rate.

· Under this method, value of assets never becomes zero but some assets become zero.

· This method is applied for long-term assets; it is not suitable for medium term assets.

· In beginning year, depreciation is very high than following years.

Differences between Fixed Installment Method and Diminishing Balance Method

Bases	Fixed installment method (FIM)	Diminishing balance method (DBM)
Basis	Depreciation is charged on original or fixed cost of asset.	Depreciation is charged on reducing balance.
Yearly depreciation	Under this method, yearly depreciation is equal or same each year.	Under this method, yearly depreciation is decreased each year.
Ending value	Generally, under FIM ending value will be zero.	Generally, under DBM ending value will never be zero.
Accept	Tax department does not accept FIM.	Tax department accepts DBM.

Suppose value of an asset is $100 and depreciation rate is 10%

	Date	FIM or SLM		DBM or WDV
Purchase value	1 Jan 2018	100		100.00
Depreciation	31 Dec 2018	10	∵ 100@10% = 10	10.00	∵ 100@10% = 10
Book value	1 Jan 2019	90		90.00
Depreciation	31 Dec 2019	10	∵ 100@10% = 10	9.00	∵ 90@10% = 9
Book value	1 Jan 2020	80		81.00
Depreciation	31 Dec 2020	10	∵ 100@10% = 10	8.10	∵ 81@10% = 8.1
Book value	1 Jan 2021	70		72.90

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 5A

BR Textile Company purchased a machine on 1 January 2018 cost Rs 450,000. The company paid Rs 30,000 for transportation and Rs 20,000 for installation. Company charges depreciation on written down value methods. The useful life of machine is 4 years with residual value Rs 64,800.

Required: from 2018 to 2020

(a) Rate of depreciation; (b) Journal entries; (c) Machine account; (d) Depreciation account

[Answer: Depn rate = 40% p.a.; Balance in 20X4 = Rs 64,800;

Depn = Rs 200,000; Rs 120,000; Rs 72,000; Rs 43,200;

Solution:

Working note	Amount
Purchase value	500,000
Less: Depreciation 40%	–200,000
Book value	300,000
Less: Depreciation 40%	–120,000
Book value	180,000
Less: Depreciation 40%	–72,000
Book value	108,000
Less: Depreciation 40%	– 43,200
Book value	64,800

Journal Entries

(In the book of BR Textile Company)

Date	Particulars		LF	Amount Dr	Amount Cr
2018	Asset purchased, transport and installation paid
1 Jan	Machinery account	Dr		500,000
	To Bank account				500,000
	(Being- machinery purchased, transport and installation paid)
31 Dec 11	Depreciation charged on machine
	Depreciation account	Dr		200,000¹
	To Machinery account				200,000
	(Being- depn charged on machinery
	500,000 @ 40%)
31 Dec 11	Depreciation transfer to profit and loss
	Profit and loss account	Dr		200,000
	To Depreciation account				200,000
	(Being- depreciation transferred to P&L account)
2019	Depreciation charged on machine
31 Dec	Depreciation account	Dr		120,000²
	To Machinery account				120,000
	[Being- depreciation charged on machinery (500,000 – 200,000¹) @ 40%]
31 Dec	Depreciation transfer to profit and loss
	Profit and loss account	Dr		120,000
	To Depreciation account				120,000

	(Being- depreciation transferred to P&L account)
2020	Depreciation charged on machine
31 Dec	Depreciation account	Dr		72,000³
	To Machinery account				72,000
	[Being- depreciation charged on machinery
	(500,000 – 200,000¹ – 120,000²) @ 40%]
31 Dec	Depreciation transfer to profit and loss
	Profit and loss account	Dr		72,000
	To Depreciation account				72,000
	(Being- depreciation transferred to P&L account)
2021	Depreciation charged on machine
31 Dec	Depreciation account	Dr		43,200
	To Machinery account				43,200
	[Being- depreciation charged on machinery
	(500,000 – 200,000¹ – 120,000² – 72,000³) @ 40%]
31 Dec	Depreciation transfer to profit and loss
	Profit and loss account	Dr		43,200
	To Depreciation account				43,200
	(Being- depreciation transferred to P&L account)

Machine Account

BR Textile Company

for 31 December …

Date	Particulars	Amount	Date	Particulars	Amount
2018			2018		–
Jan, 1	To Bank account	500,000	Dec, 31	By Depreciation account	200,000
			Dec, 31	By Balance c/d	300,000
		500,000			500,000
2019			2019
Jan, 1	To Balance b/d	300,000	Dec, 31	By Depreciation account	120,000
			Dec, 31	By Balance c/d	180,000
		300,000			300,000
2020			2020
Jan, 1	To Balance b/d	180,000	Dec, 31	By Depreciation account	72,000
			Dec, 31	By Balance c/d	108,000
		180,000			180,000
2021			2021
Jan, 1	To Balance b/d	108,000	Dec, 31	By Depreciation account	43,200
			Dec, 31	By Balance c/d	64,800
		108,000			108,000

Depreciation Account

BR Textile Company

for 31 December …

Date	Particulars	Amount	Date	Particulars	Amount
2018			2018
Dec, 31	To Machine account	200,000	Dec, 31	By Profit and loss account	200,000
		200,000			200,000
2019			2019
Dec, 31	To Machine account	120,000	Dec, 31	By Profit and loss account	120,000
		120,000			120,000
2020			2020
Dec, 31	To Machine account	72,000	Dec, 31	By Profit and loss account	72,000
		72,000			72,000
2021			2021
Dec, 31	To Machine account	43,200	Dec, 31	By Profit and loss account	43,200
		43,200			43,200

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PROBLEMS AND ANSWERS OF DEPRECIATION

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 5A

BT Textile Company purchased an automatic machine for Rs 40,96,000 on 1^st January 2018. The scrap value of the machinery was Rs 12,96,000 at the end of 4^th years. The company charges depreciation on residual balance method. Accounts are closed as per calendar year.

Required: (a) Rate of depreciation; (b) Machinery account for 4 years; (c) Depreciation account for 4 years

[Answer: Depreciation rate = 25%;

Balance in 2021 = Rs 12,96,000]

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