Diminishing Balance Method

Last Updated On -23 May 2025

One important accounting idea that lets companies distribute the cost of a physical item throughout its useful life is depreciation. Among several techniques of depreciation, the Diminishing Balance Method, also called Written Down Value Method, is most often utilized because of its reasonable approach to show the declining value of an asset over time. For assets whose value decreases over the first years of operation, this approach is especially recommended.

We shall explore in this blog the meaning, formula, benefits, constraints, and practical uses of the Diminishing Balance Method. Whether your interests are accounting or commerce, mastery of fixed asset accounting depends on knowing this approach.

What is the Diminishing Balance Method?

Rather than its initial cost, the Diminishing Balance Method computes depreciation as a preset percentage of the book value of each asset at the start of the year. The base value lowers as the asset depreciates, therefore lowering the depreciation costs over time.

This approach more accurately captures the operation of assets such as equipment, cars, and electronics, where their value and efficiency drop significantly in the early years of use.

Diminishing Balance Method Formula

One can determine the annual depreciation by applying the formula:

Depreciation = Book Value at Beginning of Year × Rate of Depreciation (%)

Example:

Lets us say a machine is purchased for ₹1,00,000 with a depreciation rate of 20% per annum

Year 1 Depreciation = ₹1,00,000 × 20% = ₹20,000
Year 2 Depreciation = ₹80,000 × 20% = ₹16,000
Year 3 Depreciation = ₹64,000 × 20% = ₹12,800

….. And so on

Key Characteristics of the Diminished Balance Approach

For both internal accounting and tax computation, many companies use this approach. Under Indian accounting standards, it is generally agreed upon and used for IT assets, cars, and high-tech gear. Furthermore, under Schedule IInd of the Indian Companies Act allows the adoption of this approach, which is why Indian businesses use it rather widely.

More depreciation is recorded in the first years of life of an asset.
It corresponds with the real drop in asset value or efficiency.
The written-down value of the asset determines the annual change in depreciation amount.

Key Advantages of Diminishing Balance Method

For assets with fast wear and tear, the Diminishing Balance Method provides a sensible way to figure depreciation. Higher depreciation in the early years helps to more fairly represent the real use and value loss of an item. Although it might not be appropriate for all kinds of fixed assets, many accounting experts and companies use it for its benefits.

Improved Revenue and Expense Matching increased depreciation early on fits better with increased revenue generation since assets are frequently more productive in their early years.
Higher depreciation in the first years results in reduced taxable profits, therefore favouring companies.
Ideal for swiftly losing value items like cars and technology equipment, Fast-Wearing items
Simple Calculation: Based on a steady annual percentage rate, computable easily.

Limitations of the Diminishing Balance Method

This approach not only improves your basis in accounting but also gets you ready for additional education and professions in business analysis, taxes, and finance.

Not even after many years does the book value of the asset ever zero.
Not suitable for all assets; not great for furniture or buildings, which lose value more steadily.
Understate Book worth: Though in use, the asset could have very low worth on paper.

Did you know?

Under Indian GAAP and taxes rules notably, the Diminishing Balance Method is sometimes referred to as the "Reducing Balance Method" or "Written Down Value Method" in different accounting systems.