Declining balance is an accelerated depreciation method that multiplies the book value of an asset with a constant depreciation rate to determine the annual depreciation expense. The particular type is the double-declining balance method, also known as the 200% declining balance method.

To calculate depreciation costs, we must determine the straight-line rate, which is 100% divided by the number of years of the useful life of the asset. For example, if the useful life of an asset is ten years, the straight-line rate will be 10% (100/10).

Next, we must determine the acceleration factor, say 200% (double-declining balance method), which is multiplied by the straight-line rate. The depreciation rate of 20% (200% x 10%) is then applied to the net book value of assets to determine depreciation costs.

- The useful life = 10 years
- Straight-line rate = 100%/10 = 10%
- Acceleration factor = 200% or 2
- Depreciation rate = 2 x 10%

To calculate depreciation expense, we can use the following declining balance formula:

**Depreciation expense = Depreciation rate x Cost of the asset **

Assuming the cost of assets is Rp100, the depreciation expense in the first year is Rp20 = Rp100 x 20%. The book value of assets dropped to Rp80 = Rp100-Rp20 at the end of the second year. Therefore, the depreciation expense in the second year is Rp16 = (Rp100-Rp20) x 20%.

## Consequences

The declining balance method offers more significant tax benefits in the initial year of use of the asset. Compared to the straight-line method, this method recognizes a higher depreciation expense at the beginning of the asset’s useful life. Therefore, profit before tax will be smaller, and as a consequence, the tax deduction is also lower.