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.
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.
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.
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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|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cash Book |
|
Trial Balance & Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
Final Accounts: Class 11 |
|
Adjustment in Final Accounts |
|
Capital and Revenue |
|
Single Entry System |
|
Non-Trading Concern |
|
Government Accounting |
|
Goswara Voucher (Journal Voucher) |
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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 |
#####
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 1st January 2018. The scrap value of the machinery was Rs 12,96,000 at the end of 4th 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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