Diminishing balance method is method of depreciating non current asset which is also known as the, `reducing installment system’, or `written down value method’,. This method applies depreciation as a fixed percentage to the balance of the net cost of the asset not yet allocated at the end of the previous accounting period. The percentage of depreciation is so fixed that, theoretically, the balance of the unallocated cost at the end of the estimated useful life of the asset should be equal to the estimated residual value.
Unlike the fixed installment system (straight line method), depreciation under this method is not fixed, but gradually decreasing. As such, in the initial periods, the amount will be much higher, but negligible in the later period of the asset. Thus, this method tends to offset the amount of depreciation on the one hand and repairs and maintenance on the other. This method is also simple, although the calculation of depreciation is a bit complicated. Further, as and when additions are made to the asset, fresh calculations do not become necessary. This method is best suited to assets such as plant and machinery which have a long life.
The entry to be made on writing off depreciation under any method is:
Depreciation a/c ….. Dr
To asset a/c
The depreciation account goes to the debit of the profit and loss account.
The entry for this is:
Profit and loss a/c … Dr
To depreciation a/c
The asset appears at its reduced value in the balance sheet.