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Asked Nov 23, 2019
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Write a note on the Diminishing Balance Method of providing depreciation. Give an illustration. 

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Expert Answer

Step 1

Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

Step 2

Diminishing balance method of providing depreciation: Under this method, the depreciation will be charged at a particular fixed percentage on the book value of the assets. The book value of the asset will be reducing each and every year and so the amount of the depreciation also decreases every year. This diminishing balance method is also known as the “written down value method or reducing balance method”.

Step 3

Illustration for diminishing balance method of providing depreciation:

P and sons purchased machinery on 1st April 2019 for $400,000 from S and Sons and paid $100,000 for the installation. The useful life of the machinery is 3 years and the estimated residual val...

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Depreciable Calculation of Depreciation Year Percentage depreciable cost cost amount Initial cost 2019 (S400,000+$100,000) 2020 $5000,000-$37,500 2021 $462,500-$46,250 2022 $416,250-$41,625| 10% 500,000 37,500 462,500 10% 46,250 41,625 416,250 10% 374,625 10% 37.463 Total depreciation 162,838

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Depreciation Accounting

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