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Simple English definitions for legal terms
declining-balance depreciation method
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A quick definition of declining-balance depreciation method:
The declining-balance depreciation method is a way to estimate how much an asset will wear out or become obsolete over its useful life. This method is used to calculate the annual tax deduction for depreciation. It works by multiplying the asset's undepreciated cost each year by a uniform rate that may not exceed double the straight-line rate or 150 percent. This means that the asset will be depreciated more quickly in the earlier years of its life and less quickly in the later years.
A more thorough explanation:
The declining-balance depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is useful in calculating the allowable annual tax deduction for depreciation.
For example, let's say a company purchases a machine for $10,000 with a useful life of five years. Using the declining-balance depreciation method with a rate of 40%, the first year's depreciation would be $4,000 (40% of $10,000). The second year's depreciation would be $2,400 (40% of the remaining $6,000), and so on.
This method allows for larger deductions in the earlier years of an asset's life and smaller deductions in the later years, reflecting the asset's decreasing value over time.