Declining Balance Method

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Definition of 'Declining Balance Method'

The declining balance method is a depreciation method that results in a decreasing depreciation expense over the life of an asset. This method is often used for assets that have a relatively short useful life, such as machinery or equipment.

The declining balance method is calculated by multiplying the asset's cost by a depreciation rate that is applied each year. The depreciation rate is typically a fixed percentage of the asset's value, but it can also be based on the asset's declining book value.

The declining balance method results in a higher depreciation expense in the early years of an asset's life and a lower depreciation expense in the later years. This can be beneficial for tax purposes, as it allows businesses to claim larger depreciation deductions in the early years of an asset's life.

However, the declining balance method can also result in a lower book value for an asset over its useful life. This can make it more difficult for businesses to obtain financing for the asset, as lenders may be more reluctant to lend money against an asset that has a low book value.

Overall, the declining balance method is a depreciation method that can be beneficial for businesses in terms of tax savings. However, it is important to weigh the benefits of this method against the potential drawbacks before making a decision.

Here are some additional details about the declining balance method:

* The declining balance method is also known as the double-declining balance method.
* The declining balance method is not allowed for tax purposes in some countries.
* The declining balance method can be used for both tangible and intangible assets.
* The declining balance method is not as commonly used as the straight-line method of depreciation.

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