How to Calculate Depreciation on the Diminishing Balance Method

The diminishing balance method, also known as the reducing balance method, is a depreciation method in which an asset loses a fixed percentage of its remaining book value each year rather than the original cost. This means the depreciation expense is higher in the early years of the asset’s life and decreases over time. The method is commonly used for assets such as vehicles, machinery, and equipment that lose value more rapidly during their initial years. Learning how to calculate depreciation using the diminishing balance method helps businesses prepare accurate financial statements and manage asset values effectively.

1. Determine the Cost of the Asset

Begin by identifying the original purchase price of the asset. This includes the purchase cost and any expenses incurred to bring the asset into use, such as delivery and installation costs.

The total cost forms the starting point for calculating depreciation.

• Identify the purchase price
• Include installation and delivery costs
• Record the total asset cost

2. Determine the Depreciation Rate

Choose the annual depreciation rate that will be applied to the asset. The rate may be determined by company policy, accounting standards, or tax regulations.

A higher depreciation rate results in larger depreciation expenses during the early years.

• Identify the annual depreciation rate
• Use the approved accounting policy
• Apply the same rate each year

3. Calculate the First Year’s Depreciation

Multiply the original cost of the asset by the depreciation rate to calculate the depreciation for the first year.

For example, if an asset costs Sh 500,000 and the depreciation rate is 20%, the first year’s depreciation will be:

Depreciation = Sh 500,000 × 20% = Sh 100,000

The book value at the end of the first year becomes:

Sh 500,000 − Sh 100,000 = Sh 400,000

• Multiply the asset cost by the depreciation rate
• Calculate the first year’s depreciation
• Determine the new book value

4. Calculate Depreciation for the Following Years

For each subsequent year, apply the same depreciation rate to the remaining book value instead of the original cost.

For example, during the second year:

Depreciation = Sh 400,000 × 20% = Sh 80,000

The new book value becomes:

Sh 400,000 − Sh 80,000 = Sh 320,000

Continue this process until the asset reaches its residual value or the end of its useful life.

• Use the remaining book value each year
• Apply the same depreciation rate
• Reduce the book value annually

5. Review the Asset Value Annually

At the end of each financial year, review the depreciation calculations and confirm that the book value is accurate.

Stop depreciating the asset once it reaches its estimated residual value or the end of its useful life.

• Review annual depreciation records
• Confirm the remaining book value
• Stop depreciation at the residual value

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