Diminishing balance depreciation
An asset costs €6,000 and has a life of four years and a residual value of €1,500. It calculates that the appropriate depreciation rate on the declining balance is 29% and that the depreciation charge in years 1-4 will be as follows:
|
€ |
||
|
Year 1 |
Cost |
6,000 |
|
Year 2 |
Depreciation at 29%of €4,243 Net book value |
1,243 |
|
Year 3 |
Depreciation at 29% of €3,000 Net book value |
879 |
|
Year 4 |
Depreciation at 29%of €2,121 Net book value |
621 |
The sum of digits method is another form of the reducing balance method, but one that is based on the estimated life of the asset and which can therefore easily be applied if the asset has a residual value. If an asset has an estimated useful life of four years then the digits 1, 2, 3, and 4 are added together, giving a total of 10. Depreciation of four-tenths, three-tenths and so on, of the cost of the asset, less any residual value, will be charged in the respective years. The method is sometimes called the ‘rule of 78’, 78 being the sum of the digits 1 to 12.
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