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Declining Method of Depreciation

1.

Using the equation for declining balance--annual depreciation = 1 divided by the number of years the asset will be used times the previous years price of the asset--fill in the known values.

For example, you purchase a car for $40,000 and you plan to use the car for five years. $40,000 is the previous year's price of the asset, and 5 is the number of years you will drive the car. Annual depreciation = 1/5(40,000) or $8,000. This means, your $40,000 car depreciated $8,000 during the first year of use.

2.

Calculate the value of the asset in the second year by subtracting the first year's annual depreciation amount from the beginning price of the asset.

Using your example car, the first year 's price of $40,000, less the $8,000 annual depreciation calculated for the first year equals $32,000.

3.

Continue this procedure to calculate the yearly depreciation amount of the asset until the life of the asset is completed.

For your car, for instance, annual depreciation for the second year = 1/5($32,000), or $6,400. So the beginning value of your car in Year 3 would be the value of Year 2, $32,000, minus $6,400, or $25,600 and so forth.



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