Calculate Diminishing Value

The diminishing value method, also known as the reducing balance method or declining balance method, is an accelerated depreciation technique used to expense a higher proportion of an asset's cost in its early years and less in later years. This method is often preferred for assets that lose value quickly or are more productive in their initial years.

Unlike the straight-line method, which spreads depreciation evenly over an asset's useful life, the diminishing value method applies a fixed depreciation rate to the asset's carrying value (or book value) at the beginning of each accounting period. This results in larger depreciation expenses at the start and smaller expenses towards the end of the asset's life.

How the Diminishing Value Method Works:

  1. Determine Initial Cost: The original purchase price of the asset.
  2. Estimate Useful Life: The number of years the asset is expected to be productive.
  3. Determine Diminishing Value Rate: This is a percentage applied to the book value. It's often a multiple of the straight-line rate (e.g., 150% or 200% of the straight-line rate). For example, if an asset has a 10-year useful life, its straight-line rate is 10% (1/10). A 200% declining balance rate would be 20% (2 * 10%).
  4. Estimate Salvage Value: The estimated residual value of the asset at the end of its useful life. Depreciation stops when the asset's book value reaches its salvage value.

Formula:

Annual Depreciation = Beginning Book Value × Diminishing Value Rate

The book value at the end of the year becomes the beginning book value for the next year, less the depreciation for the current year. Depreciation ceases when the asset's book value equals its salvage value, even if the useful life has not fully expired.

Example:

Consider a machine purchased for $50,000 with a useful life of 5 years, a diminishing value rate of 30%, and an estimated salvage value of $5,000. Using the calculator below, you can see how the depreciation expense decreases each year, and the asset's book value approaches the salvage value.

  • Year 1: Beginning Book Value = $50,000. Depreciation = $50,000 * 30% = $15,000. Ending Book Value = $35,000.
  • Year 2: Beginning Book Value = $35,000. Depreciation = $35,000 * 30% = $10,500. Ending Book Value = $24,500.
  • Year 3: Beginning Book Value = $24,500. Depreciation = $24,500 * 30% = $7,350. Ending Book Value = $17,150.
  • Year 4: Beginning Book Value = $17,150. Depreciation = $17,150 * 30% = $5,145. Ending Book Value = $12,005.
  • Year 5: Beginning Book Value = $12,005. Depreciation = $12,005 * 30% = $3,601.50. Ending Book Value = $8,403.50.

In this example, after 5 years, the asset's book value is $8,403.50, which is above the salvage value of $5,000. If the useful life were longer, depreciation would continue until the book value reached $5,000.

Diminishing Value Depreciation Calculator









function calculateDiminishingValue() { var initialCost = parseFloat(document.getElementById('initialCost').value); var usefulLife = parseInt(document.getElementById('usefulLife').value); var diminishingRate = parseFloat(document.getElementById('diminishingRate').value) / 100; // Convert to decimal var salvageValue = parseFloat(document.getElementById('salvageValue').value); var resultDiv = document.getElementById('result'); resultDiv.innerHTML = "; // Clear previous results // Input validation if (isNaN(initialCost) || initialCost < 0) { resultDiv.innerHTML = 'Please enter a valid Initial Asset Cost (a non-negative number).'; return; } if (isNaN(usefulLife) || usefulLife < 1) { resultDiv.innerHTML = 'Please enter a valid Useful Life (at least 1 year).'; return; } if (isNaN(diminishingRate) || diminishingRate 1) { // Rate should be > 0 and <= 100% resultDiv.innerHTML = 'Please enter a valid Diminishing Value Rate (between 0 and 100%).'; return; } if (isNaN(salvageValue) || salvageValue = initialCost) { resultDiv.innerHTML = 'Salvage Value must be less than the Initial Asset Cost for depreciation to occur.'; return; } var currentBookValue = initialCost; var totalDepreciation = 0; var depreciationSchedule = []; for (var year = 1; year <= usefulLife; year++) { var beginningBookValue = currentBookValue; var depreciationThisYear = 0; // Calculate potential depreciation var potentialDepreciation = beginningBookValue * diminishingRate; // Check if potential depreciation would bring book value below salvage value if ((beginningBookValue – potentialDepreciation) < salvageValue) { depreciationThisYear = beginningBookValue – salvageValue; currentBookValue = salvageValue; } else { depreciationThisYear = potentialDepreciation; currentBookValue -= depreciationThisYear; } // Ensure depreciation is not negative (can happen if beginningBookValue is already at salvageValue) if (depreciationThisYear < 0) { depreciationThisYear = 0; } depreciationSchedule.push({ year: year, beginningBookValue: beginningBookValue, depreciation: depreciationThisYear, endingBookValue: currentBookValue }); totalDepreciation += depreciationThisYear; // Stop depreciating if salvage value is reached or exceeded if (currentBookValue <= salvageValue) { break; } } // Display results var resultsHTML = '

Depreciation Schedule

'; resultsHTML += 'Total Depreciated Amount: $' + totalDepreciation.toFixed(2) + "; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; for (var i = 0; i < depreciationSchedule.length; i++) { var item = depreciationSchedule[i]; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; resultsHTML += ''; } resultsHTML += '
YearBeginning Book ValueDepreciation ExpenseEnding Book Value
' + item.year + '$' + item.beginningBookValue.toFixed(2) + '$' + item.depreciation.toFixed(2) + '$' + item.endingBookValue.toFixed(2) + '
'; resultDiv.innerHTML = resultsHTML; }

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