Declining Balance Method (depreciation rate)

Description

n financial accounting, an asset is an economic resource. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. In determining the profits (net income) from an activity, the receipts from the activity must be reduced by appropriate costs. One such cost is the cost of assets used but not immediately consumed in the activity. Such cost so allocated in a given period is equal to the reduction in the value placed on the asset, which is initially equal to the amount paid for the asset and subsequently may or may not be related to the amount expected to be received upon its disposal. Depreciation is any method of allocating such net cost to those periods in which the organization is expected to benefit from use of the asset. Straight-line depreciation is the simplest and most often used method. In this method, the company estimates the salvage value (scrap value) of the asset at the end of the period during which it will be used to generate revenues (useful life). With the Declining Balance Method, one can find the depreciation rate that would allow exactly for full depreciation by the end of the period.

Related formulas

Variables

DRDepreciation rate (dimensionless)
RVResidual Value (the future value of a good in terms of absolute value in monetary terms) (dimensionless)
CFACost of Fixed Asset (dimensionless)
NThe estimated life of the asset (for example, in years) (dimensionless)