Declining Charge Depreciation Methods
In case of these methods the amount charged for depreciation declines over the asset’s expected life. These methods are suitable in those ease where (a) the receipts are expected to decline as the asset gets older and it is believed that the allocation of depreciation should be related to the pattern of asset’s expected receipts.
Following methods fall in this category.
(a) Diminishing balance method. According to this method, depreciation is charged on the book value of the asset each year. Thus, the amount of depreciation goes on decreasing every year. For example, if the cost of an asset is Rs 20,000, and the rate of depreciation is 10%, the amount of depriciation to be charged in the first year will be a sum of Ps 2,000. In the second year, depreciation will be charged at 10% on the hook value of the asset, i.e., Rs 18,000 (i.e., Rs 20,000— Ps 2,000) and so on.
Merits. (i) The method puts an equal burden for use of the asset on each subsequent year. The amount of depreciation goes on decreasing for each subsequent year while the charge for repairs goes on increasing for each subsequent year. Thus, increase in the cost of repairs for each subsequent year is compensated by decrease in the amount of depreciation for each subsequent year.
(ii) The method is simple to understand and easy to follow.
Demerits. (i) The value of the asset cannot be brought down to zero under this method.
(ii) The detennination of a suitable rate of depreciation is also difficult under this method as compared to the Fixed Instalment Method.