Just like the previous two depreciation types described above, the declining balance method of depreciation also comprises of a scheduled calculation. Here, the amounts that you subtract from the asset’s value are continuously reduced **over the course of its useful life**. However, in this method, greater depreciation occurs in the early years of an asset’s life, and smaller depreciation in its later years.

The declining balance depreciation method is also seen as a factor which drives economic development, as it allows a business to set its funds free in less time to make quick re-investments possible.

Furthermore, the depreciation follows a **geometric sequence**, whereby the value diminishment refers back to the asset’s book value at the beginning of the accounting period. In other words, the same percentage is always depreciated from the asset’s latest carrying value (30% for instance). This form of depreciation can also follow an arithmetic sequence, in which the depreciation is determined using a declining numerical sequence.

The depreciation method in question sticks to the following formula:

*Asset’s book value of the previous year multiplied by the depreciation rate = depreciable amount*

The depreciation rate is expressed as a percentage. What must also be remembered is that only the asset’s production or purchase costs are to be considered in the year in which it was acquired.

For example, upon purchasing **machinery worth $100,000 for your company**, it is assumed that its useful life is ten years and its annual depreciation lies at a constant rate of 20%. The diminishment of the asset’s value during its acquisition year also depends on the month in which it was obtained. To simplify the calculations, however, the acquisition in the example below took place in January.

**First year**: 20% depreciation rate on $100,000 = **$20,000**, remaining book value: $80,000

**Second year**: 20% depreciation rate on the remaining $80,000 = **$16,000**, new remaining book value: $64,000

**Third year**: 20% depreciation rate on the remaining $64,000 = **$12,800**, new remaining book value: $51,200

**Fourth year**: 20% depreciation rate on the remaining $51,200 = **$10,240**, new remaining book value: $40,960

And so on.

Mathematically speaking, with the aid of this depreciation method, it is not possible for the asset to reach a zero value. However, it is possible to switch to the straight-line depreciation method at any given stage of the asset’s useful life, preferably when the straight-line depreciation amount is higher than that of the declining balance depreciation method.