What Is Declining Balance Depreciation?

Declining balance depreciation (also called reducing balance depreciation, the diminishing balance method, or the written-down value method) charges a fixed percentage of an asset’s remaining book value each year, rather than a fixed amount. Because the base shrinks every year, the depreciation expense is largest in year one and falls steadily after that - front-loading the cost into the years when the asset actually loses most of its value.

It is one member of the family of accelerated depreciation methods, alongside sum-of-the-years’-digits. Its opposite number is straight-line depreciation, which spreads the same total cost evenly.

What you will learn

• How it works: the formula, step by step
• The rate for each useful life
• Double declining, 150% and choosing the factor
• A worked example with the full schedule
• Declining balance vs straight-line, side by side
• Switching to straight-line: the crossover
• Assets bought part-way through the year
• Working it out in a spreadsheet
• How it shows up in the accounts
• Book depreciation versus tax depreciation
• Which assets suit declining balance
• What happens on disposal
• Common mistakes
• Declining balance in practice

How it works: the formula, step by step

The whole method is three lines of arithmetic.

1. Straight-line rate = 1 ÷ useful life in years
2. Declining balance rate = straight-line rate × factor (commonly 150%, 175% or 200%)
3. Annual depreciation = declining balance rate × book value at the start of the year

For the double declining balance variant the first two steps collapse into one shortcut: rate = 2 ÷ useful life. A five-year asset therefore depreciates at 2 ÷ 5 = 40% a year.

The rate is fixed; the base is whatever value is left. Note what is missing from the formula: salvage value is not subtracted up front as it is in straight-line. Instead it acts as a floor - the asset is never written down below it.

A percentage of a remainder never quite reaches zero, so every declining balance schedule needs an ending: either depreciation stops when book value hits the salvage value, or the method switches to straight-line for the final years so the asset fully writes down on time.

There is also a less common derivation, sometimes called the constant-percentage or Matheson formula, which reverse-engineers the rate so the schedule lands exactly on salvage with no switch and no cap:

rate = 1 - (salvage value ÷ cost)^(1 ÷ useful life)

On a €1,000 asset with €100 salvage over five years that gives 1 - 0.1^0.2 = 36.9%. Apply 36.9% to the opening book value five times and the final figure is €100 to the cent. It is the rate spreadsheets use for the fixed declining balance function, and it is worth knowing when you want a clean landing rather than a rule-of-thumb rate.

The rate for each useful life

The rate depends only on the useful life and the factor, so it is worth having the common ones to hand.

A three-year life at a 200% factor gives 66.7%, which writes off two thirds of the asset in year one - fast enough that many policies cap short-life assets at 150% instead.

Double declining, 150% and choosing the factor

The factor is the multiplier applied to the straight-line rate, and it is the only real judgement call in the method. Three are in common use.

• 200% (double declining balance) is the default most people mean by “the declining balance method”. It suits assets that lose value steeply and early: laptops, phones, tablets and other fast-obsolescing technology, where the secondhand price after twelve months bears little relation to the invoice.
• 150% is gentler. It fits vehicles, forklifts, plant and site equipment that hold their value better and wear over a longer arc, and it is the factor many fixed-asset policies adopt as a middle ground when 200% feels aggressive.
• 175% turns up occasionally, usually because a tax or reporting regime prescribes it rather than because anyone chose it.

Two things are worth being clear about. First, some regimes fix the factor for you - if a tax authority publishes a reducing-balance percentage, that is the number, and your own judgement applies only to the book figure. Second, and more importantly, the factor does not change how much depreciation you take in total, only when you take it. Across the full life the asset is written down from cost to salvage either way. A higher factor simply pulls more expense into year one, which depresses year-one operating profit and produces a lower carrying value on the balance sheet sooner. That is a timing and presentation decision, not a way to expense more.

A worked example with the full schedule

A €1,000 tablet with a five-year life and €100 salvage value, on double declining balance at 40%, bought on 1 January.

Year five needs a word of explanation, because a reader checking the arithmetic will notice the figure does not follow the rate. Forty per cent of €129.60 is €51.84, which would take the book value down to €77.76 - below the €100 salvage floor. The charge is therefore capped at €29.60, exactly the amount that brings the asset to salvage and no further. That cap is the salvage floor doing its job, not an error.

In this particular schedule €640 of the €900 total lands in the first two years. That is a consequence of a 40% rate on a five-year life, not a general law - at 150% on the same asset the first two years would carry €510. The higher the factor and the shorter the life, the more front-loaded the curve.

Declining balance vs straight-line, side by side

The clearest way to see the difference is to run both methods on the same asset. Straight-line on the €1,000 tablet is (1,000 - 100) ÷ 5 = €180 every year.

The crossover is visible in year three: declining balance charges more than straight-line in years one and two, then less from year three onward. Both methods start at €1,000 and end at €100, and both total €900. Nothing is gained or lost overall.

What does change is the shape of the accounts. Year one under declining balance carries €220 more expense, so operating profit is lower and margins look thinner in the year of purchase - which is the honest picture if the asset really did lose that much value. The balance sheet follows: after two years the tablet is carried at €360 rather than €640, closer to what it would actually fetch. By year four the pattern reverses and declining balance flatters the income statement, because most of the cost is already behind you.

Switching to straight-line: the crossover

Because a shrinking percentage of a shrinking base never reaches zero, most declining balance schedules include an automatic switch. The rule is simple and mechanical:

Each year, compare the declining balance charge against (remaining book value - salvage value) ÷ remaining years. Switch permanently in the first year the straight-line figure is equal to or larger than the declining balance figure.

From that point the charge is flat and the asset lands exactly on salvage at the end of its useful life.

The tablet example above never triggers the switch, because its €100 salvage floor bites first. To see the crossover clearly, take the same €1,000 asset with a five-year life and zero salvage value, still at 40%.

In year four the straight-line figure on the remaining book value (€216 over two remaining years = €108) overtakes the declining balance figure of €86.40, so the switch happens there. Years four and five each carry €108, and the asset writes down to zero on time. The total is still €1,000.

Two practical notes. Published tax depreciation tables in several regimes already bake this switch into their percentages, so you never see the comparison being made - you just read the year’s rate off a table. And spreadsheet functions handle it for you, which is the subject of a later section.

Assets bought part-way through the year

The example above quietly assumes a 1 January purchase. Almost nothing is bought on 1 January.

The straightforward approach is to pro-rate year one by the months the asset was in service. The same €1,000 tablet bought on 1 October gets three twelfths of the full-year charge, and everything after that runs normally on the reduced book value.

Note the knock-on effect: a five-year asset now appears in six accounting years, because the first and last are both partial. That surprises people who expect the schedule to match the useful life exactly.

Many policies avoid month-by-month arithmetic with a convention - a simplifying assumption about when assets are deemed to enter service, applied consistently to everything.

• Half-year convention - every asset is treated as bought mid-year, so year one gets half a full charge regardless of the actual date.
• Mid-month convention - the asset is deemed in service in the middle of its month of purchase.
• Mid-quarter convention - the same idea at quarter granularity, sometimes mandatory when a large share of the year’s purchases land late in the year.
• Full month of purchase - a full month’s charge for the month bought, none for the month disposed.

Conventions are a policy choice, not an accounting truth. Whichever you pick, apply it to every asset in the class and document it. And all of them share one hard dependency: the purchase date on the asset record has to be accurate, because it is the input that decides how much of year one you get. Guessing at dates from memory at year-end is where partial-year schedules go wrong.

Working it out in a spreadsheet

Every mainstream spreadsheet ships three functions for this, and knowing which one to reach for saves a lot of manual arithmetic.

• DDB(cost, salvage, life, period, [factor]) returns the charge for one whole period using the declining balance rate. The factor argument defaults to 2, so leaving it out gives you double declining balance; pass 1.5 for the 150% variant. It respects the salvage floor but does not switch to straight-line.
• DB(cost, salvage, life, period, [month]) is the fixed declining balance function. It derives its rate from the constant-percentage formula above rather than from a factor, and the optional month argument handles a partial first year - DB(1000, 100, 5, 1, 3) gives the charge for an asset in service for three months of year one.
• VDB(cost, salvage, life, start_period, end_period, [factor], [no_switch]) is the most complete of the three. It handles partial periods through fractional start and end values, and by default it performs the automatic switch to straight-line described above. Pass TRUE as the last argument to suppress the switch.

If you would rather see the working than trust a function, build the four-column layout by hand - it takes a minute and it audits itself:

Keep the rate in one cell rather than typing 0.4 down the column - changing the factor then becomes a one-cell edit, and anyone reviewing the sheet can see immediately what rate was used. Adding a fifth column for cumulative depreciation makes the schedule reconcile straight to the accumulated depreciation balance in the accounts.

How it shows up in the accounts

The bookkeeping is identical to any other depreciation method - only the numbers differ. Each year’s charge is a debit to depreciation expense on the income statement and a credit to accumulated depreciation, a contra-asset account that sits against the asset’s original cost on the balance sheet. The asset’s cost is never reduced directly; net book value is cost minus accumulated depreciation, and it is that netted figure the balance sheet reports.

Depreciation is a non-cash expense. The cash left the business when the asset was bought - the annual charge is an allocation of that historical outlay, which is why it is added back in cash-flow analysis and excluded from EBITDA.

The accounting standards do have something to say about the choice of method. Under IAS 16 (and FRS 102 in similar terms), the depreciation method must reflect the pattern in which the asset’s future economic benefits are expected to be consumed. Declining balance is defensible precisely when that pattern is front-loaded, and hard to defend when it is not. The standards also require the method, the useful life and the residual value to be reviewed at least at each financial year end. If a review changes any of them, the change is a change in accounting estimate under IAS 8 and is applied prospectively - you adjust future charges, you do not restate the years already reported.

Book depreciation versus tax depreciation

These are two separate calculations that happen to use similar arithmetic, and conflating them is one of the most common sources of confusion.

Book depreciation is the figure in your financial statements, governed by the accounting standards described above and driven by your own estimate of useful life and consumption pattern. Tax depreciation is whatever the tax authority says it is. Many authorities ignore your book figure entirely and run their own reducing-balance system with prescribed rates, pools and rules, which means the two schedules diverge from day one and stay divergent until disposal.

A few illustrations of how varied those regimes are, current as at August 2026:

• The UK runs capital allowances on a reducing-balance pool basis rather than asset by asset. The main pool writing down allowance moves from 18% to 14% from April 2026, with the special rate pool at 6%.
• Germany permits a degressive AfA of up to three times the straight-line rate, capped at 30%, for movable assets acquired between mid-2025 and the end of 2027, with a free switch to straight-line available at any point.
• Sweden’s räkenskapsenlig avskrivning offers a 30% reducing-balance main rule (huvudregeln) alongside a 20%-of-cost complementary rule (kompletteringsregeln), with businesses generally able to take the more favourable of the two.

Treat all of that as illustration, not advice. Rates, pools, eligibility windows and thresholds change frequently and vary by asset class and entity type - check the current rules in your jurisdiction, or ask your accountant, rather than assuming your book schedule and your tax computation will agree. Practically, the fix is to keep one clean asset register with accurate cost, date and disposal data, and run whichever schedules you need from it.

Which assets suit declining balance

Declining balance fits equipment whose value drops fastest early, and whose resale curve is genuinely steep rather than merely assumed to be.

Good candidates

• Laptops, smartphones, tablets, monitors and printers - fast obsolescence, steep secondhand price curve, often replaced on a fixed hardware refresh cycle well before they physically fail.
• Company vehicles, vans and forklifts - a well-documented drop in the first year or two, then a long shallow tail. Usually a 150% factor rather than 200%.
• Power tools and site equipment - heavy early use, visible condition decline, and a resale market that discounts hard for age.

Poor candidates

Furniture, shelving, racking, fit-outs and steady-duty machinery wear evenly, so front-loading the expense misrepresents what is actually happening. Straight-line is the honest match, and it is also the better default for anyone who values a flat, predictable charge over precision.

Matching the expense to the real resale curve keeps book values honest, so a two-year-old device is not carried at an optimistic figure nobody would pay. It also pairs naturally with assets whose running costs rise with age - early years carry high depreciation and low maintenance, later years the reverse, which smooths the picture of total cost of ownership.

Declining balance is not the only alternative to straight-line, either. Units of production allocates cost by output or hours run, which suits machinery whose wear tracks usage rather than time. Sum-of-the-years’-digits is another accelerated method that front-loads expense on a different curve. Knowing the family exists stops declining balance being applied by habit to assets it does not fit.

What happens on disposal

Because declining balance writes value down fast, book value in years three to five is often below what the asset actually fetches. That makes a gain on disposal distinctly common under this method - which is the mirror image of the front-loaded expense, not a windfall.

The mechanics are short. Remove the asset’s original cost and its accumulated depreciation from the balance sheet, compare the sale proceeds to the net book value at the disposal date, and book the difference: proceeds above net book value are a gain, below it a loss. The tablet in the worked example is carried at €216 after three years; sold for €300 it produces an €84 gain.

The housekeeping point matters as much as the accounting one. The disposal date has to be recorded, or the schedule quietly keeps depreciating something that no longer exists. See asset disposal for the wider process.

Common mistakes

• Subtracting salvage value from the base in year one. It is a floor, not a deduction. Straight-line depreciates cost minus salvage; declining balance depreciates the full book value and simply stops at salvage.
• Applying the rate to original cost instead of opening book value. That is straight-line at a strange rate, not declining balance, and it will over-depreciate the asset badly.
• Depreciating past the salvage floor. The final year’s charge is almost always a capped figure, not the rate applied blindly - as in year five of the worked example above.
• Forgetting the schedule never reaches zero. Without a salvage stop or a switch to straight-line, a declining balance schedule runs forever at ever smaller amounts.
• Using declining balance for evenly wearing assets. If the asset does not lose value faster early, the method fails the standards’ consumption-pattern test and misstates both expense and carrying value.
• Ignoring the partial first year. A full year’s charge on an asset bought in November overstates year-one expense by a wide margin.
• Carrying ghost assets. Equipment that was sold, scrapped, lost or written off but never removed from the register keeps generating a depreciation charge and quietly overstates the fixed asset register - a problem that a periodic physical count catches and nothing else does.
• Changing the rate retrospectively. A revised useful life or method is a change in estimate applied to future periods, not a reason to restate last year’s accounts.

Declining balance in practice

The method demands slightly more bookkeeping than straight-line, because each year’s charge depends on last year’s closing book value - one bad figure propagates through every subsequent year. That makes the underlying records, not the arithmetic, the thing that decides whether a schedule is trustworthy. Purchase price, purchase date, expected useful life and disposal date for every capitalised item (CapEx, in budget terms) need to be recorded once and stay correct.

In AMPthilly, purchase price, purchase date, supplier, invoice number and expected useful life all live on each asset record, with asset valuation and depreciation tracking available on the Pro plan and CSV export for handing the figures to finance. Status changes and disposals are captured in the audit history on the asset, so a retired item stops being a live line on next year’s schedule. If your current schedule lives in a workbook nobody wants to inherit, why spreadsheets fail for asset tracking covers the failure modes; starting with a simple asset register covers the fix.

FAQ

How do you calculate the declining balance depreciation rate? Start with the straight-line rate, which is 1 divided by the useful life, then multiply it by your chosen factor. A five-year asset has a straight-line rate of 20%; at a 200% factor the declining balance rate is 40%, at 150% it is 30%. The double declining shortcut is simply 2 divided by the useful life. Apply that fixed rate to the book value at the start of each year, not to the original cost, and the charge falls year on year.

What is the difference between declining balance and straight-line depreciation? Straight-line charges the same amount every year, calculated as cost minus salvage value divided by useful life. Declining balance charges a fixed percentage of whatever book value is left, so the expense is largest in year one and shrinks after that. Total depreciation over the asset’s life is identical under both methods - only the timing differs. On a €1,000 five-year asset, double declining charges €400 in year one against straight-line’s €180, then falls below it from year three.

How do you handle an asset bought part-way through the year? Pro-rate the first year’s charge by the time the asset was actually in service. An asset bought on 1 October gets three twelfths of a full year’s charge, and the remaining book value carries forward as normal. Some policies use simplifying conventions instead - half-year, mid-month or mid-quarter - which assume a standard in-service point regardless of the exact date. Either way the schedule now spans one accounting year more than the useful life, so the purchase date on each asset record has to be right.

What is the double declining balance method? Double declining balance is the most common variant: the rate is twice the straight-line rate, applied to the remaining book value. A five-year asset has a straight-line rate of 20%, so double declining charges 40% of whatever book value is left each year - 40% of cost in year one, 40% of the smaller remainder in year two, and so on. The charge shrinks every year while the rate stays fixed.

Does declining balance depreciation ever reach zero? Not on its own - a percentage of a remainder always leaves a remainder. In practice the schedule is stopped at the salvage value, or switched to straight-line in the later years so the asset fully writes down by the end of its useful life. Most accounting software and fixed-asset policies build in one of these two endings.

Is reducing balance the same as declining balance? Yes. Reducing balance is the usual British term and declining balance the usual American one; written-down value (WDV) method and diminishing balance method are further names for the same idea. All describe a fixed percentage applied to the remaining book value each period, producing a depreciation charge that falls year on year.

The takeaway

Declining balance depreciation applies a fixed percentage - straight-line rate times a factor, or 2 ÷ useful life for the double declining variant - to the book value left at the start of each year. The result is a charge that is heaviest in year one and lighter every year after, matched to assets whose value genuinely drops that way: laptops, phones, vehicles, tools. It writes off the same total as straight-line, just sooner. Give it a proper ending, either a salvage floor or a switch to straight-line, pro-rate the first year if the asset was not bought in January, and keep book and tax schedules separate. The arithmetic is easy; the discipline is in the asset records that feed it.

Related terms

• Straight-Line Depreciation - the even-charge alternative and the method most schedules eventually switch to
• Depreciation - the parent concept and the full range of methods
• Depreciation Schedule - the year-by-year table the method produces
• Net Book Value - cost minus accumulated depreciation; the base the rate is applied to each year
• Salvage Value - the floor below which the asset is never written down
• Book Value - the shrinking base the rate is applied to each year
• Useful Life - the input that sets the rate in the first place
• Asset Disposal - what happens when the asset leaves, and why gains are common here
• CapEx - the capital purchases that get depreciated in the first place
• OpEx - operating costs expensed immediately rather than spread over years
• Total Cost of Ownership - the full lifetime cost picture depreciation feeds into

Tools that make this easier

AMPthilly holds purchase price, purchase date, supplier, invoice number and expected useful life on every asset record - the exact inputs a declining balance schedule needs, in one place instead of scattered across invoices. Asset valuation and depreciation tracking come with the Pro plan, receipts and warranty documents attach to the asset so nothing is hunted for at year-end, and the audit history keeps disposals and status changes on the record so retired equipment stops generating a charge. When finance needs the numbers, CSV export hands them over. Start free - no credit card required - or talk to us about your setup.