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Diminishing Balance Method

Under this method, instead of a fixed amount, a fixed rate on the reduced balance of the assets is charged as depreciation every year. Since a constant percentage rate is being applied to the written down value, the amount of depreciation charged every year decreases over the life of the assets.



1.    As the decreasing charge for depreciation cancels out the increasing charges for repairs over the years, it gives a fair charge for depreciation.

2. No recalculation is necessary when additional assets are purchases.

3.   This method is applicable for income tax purposes.

4.    The impact of obsolescence can be reduced if a significant part of the cost is written off in early life.


1. This method lacks simplicity.

2.This method cannot be applied for assets with a very short life.

3. The assets is never fully depreciated.

4. The cost should be spread over evenly through the economic life of an assets as should be spread according to use.

Distinction Between Straight line and Diminishing Balance Method


Straight Line

Diminishing Balance

A fixed amount of depreciation is charged.

The amount of depreciation per year is the same.

At the end of its life, the book value of the assets become Zero.

It is easy to calculate the rate of depreciation.

A fixed rate of depreciation is charged.

The amount of depreciation goes on reducing.

The book value of the assets never reduces to zero.

It is difficult to calculate the rate of depreciation.

Annuity Method

The annuity method considers that the business, besides losing the original cost of the asset also loses interest, on the amount used for buying the asset, which he would have earned in case the same amount would have been invested in some other form of investment. Thus, the asset account is debited with interest, which is ultimately credited to Profit and Loss Account and is credited with amount of depreciation, which remains fixed year after year. The annual amount of depreciation is determined with the help of Annuity table. The amount of total depreciation is determined by adding the cost of the asset (i.e., purchase price) and interest there on at an expected rate. The journal entries under this method are:

(a)    Asset A/c



To Bank


(For purchase of asset)


(b) AssetA/c



To Interest


(For charging interest to asset)


(c)     Depreciation A/c...                       



To Asset


This method takes into account interest on capital invested in the asset.

(ii)    The method is most scientific as it considers the amount of depreciation from Annuity table.

(iii)    Too much calculation work becomes cumbersome.

(iv)    In case the asset requires frequent additions or extensions, the calculations have to be revised quite often thus overburdening calculation work.

(v)    Like the straight-line method, it also has tendency to inequalise the charge to profit and loss account in respect of depreciation and repairs put together because the amount of depreciation remains fixed over the life of the asset.

(vi)      Annuity method is much suited to those assets that require considerable investment and where frequent additions are not made. It is not suited for plant and machinery where additions are usually made quite often.


Let's Prctice.



Depreciation Fund Method

Under this method, the amount of depreciation goes on accumulating till the asset is completely worn out. This amount becomes readily available for the replacement of the asset. The amount of depreciation is fixed and remains the same year after year and is charged to profit and loss account every year through the creation of Depreciation Fund or Sinking Fund. The amount of annual depreciation is invested outside the business every year in good securities bearing interest at a specified rate.
The process of investing depreciation amount together with interest received goes on till the time of replacement of asset. At this time, all the securities are sold out and with cash received, the new asset is purchased. The method enables a firm to purchase very costly assets without any difficulty in arranging cash resources.


Journal Entries Under Depreciation Fund Method

At the end of first year:

(i) For setting aside the amount of depreciation
(to be found out from Sinking Fund tables)


Depreciation A/c                       ...Dr.

    To Depreciation Fund or Sinking Fund A/c.

(ii)For transfer of Depreciation A/c to Profit and Loss A/c.

Profit and Loss A/c                    ...Dr.

     To Depreciation A/c

(iii) For investing the amount outside the business:

Sinking Fund Investments A/c                                ...Dr.

                 To Bank


Every year:

(i) For receiving interest on investments:

Bank A/c



To Sinking Fund A/c


(ii) For setting aside the depreciation amount:

Depreciation A/c



To Sinking Fund or Depreciation Fund A/c.


(iii)   For investing the amount of depreciation plus interest received:

Sinking Fund Investments A/c  



To Bank


(iv)For transfer of Depreciation A/c to Profit and Loss A/c:

Profit and Loss A/c



To Depreciation A/c



In last Year:

In the last year of life of asset, the amount will be set aside and interest will be received on investments. But the same will not be invested because the money will be required to purchase new asset. However, all investments will be sold away.

(i) On sale of investments:

Bank A/c

... Dr.


To Sinking Fund Investments A/c


(ii) For transfer of profit on sale of investment:

Sinking Fund Investments A/c

... Dr.


To Sinking Fund A/c


(iii) For transfer of loss on sale of investments:

Sinking Fund A/c

... Dr.


To Sinking Fund Investments A/c


(iv) The old asset is sold out and whatever is realised is credited to asset account:

Bank A/c

... Dr.


To asset A/c


(v) Sinking Fund A/c or Depreciation Fund A/c is Transferred to asset account and any balance left in the

Asset account (old) is transferred to Profit and Loss account:

(vi) For transfer of loss:

Profit & Loss A/c

... Dr.


To Asset A/c


(vii) For transfer of Profit:

Asset A/c

... Dr.


To Profit & Loss A/c


(viii) For purchasing the new asset:

(New) Asset A/c

... Dr.


To Bank


(i) The asset is shown in the Balance Sheet as its original value throughout its life. The amount of depreciation accumulated is shown on the liabilities side under Depreciation Fund or Sinking Fund.

(ii) Under this method, due provision is made for replacement of asset at the end of its working life. This is besides making provision for depreciation on the asset every year. This feature is not found in other methods.

(iii) The main limitation of the Depreciation Fund method is that, as depreciation amount remains fixed throughout the life of the asset, it has a tendency to place unequal burden on Profit and Loss Account over different years in respect of depreciation and repairs put together. The consequence is that the burden on P&L Account in earlier years is light while in later years, it is heavy.

(iv)         The method is suitable for plant and machinery and many wasting assets requiring replacement.
Provision for repairs and renewals.

Expenditure incurred for repairs, renewals and maintenance on plant and machinery may vary over the years during the working life. Thus, for equalizing the charge of repairs and renewals, sometimes a provision for repairs and renewals account is opened.


On Ist January, 1990, a Company purchased a plant for Rs.60,000. On Ist July in the same year, it purchased additional plant worth Rs.18,000 and spends Rs.2,000 on its erection.OnIst July, 1992, the plant purchased on Istjan., 1990 having become obsolete,is sold off for Rs.27,000.On Ist October, 1993, fresh plant was purchased for Rs.64,000 and on the same date the plant purchased on Ist July,1990 was sold for Rs.10,000. Depreciation is provided at 10% per annum on Original cost on 31st Dec. every year. Show the plant Account from 1990 to 1993.


1990   Rs. 1990   Rs.
Jan.1 To Bank A/c 60,000 Dec.31 By DepreciationA/c  
July.1 To Bank A/c 18,000   (i) On Rs.60,000  
July.1 To Bank A/c(expenses) 2,000   For one year 6,000  
        (ii) On Rs.20,000 for six months       1,000  
      Dec.31 By Balance c/d  
        (i)           Rs.  54,000  
        (ii)          Rs.  19,000 73,000
    80,000     80,000
1991     1991    
Jan.1 To Balance b/d   Dec.31 By Depreciation A/c  
  (i)                 54,000     (i)                     6,000  
  (ii)                19,000 73,000   (ii)                    2,000 8,000
      Dec.31 By Balance A/c  
        (i)                   48,000  
        (ii)                  17,000 65,000
    73,000     73,000
1992     1992    
Jan.1 To Balance b/d   July 1 By Bank A/c 27,000
  (i)                    48,000   July 1 By Depreciation A/c  
  (ii)                   17,000 65,000   (On Rs.60,000 for  
        Six Months) 3,000
      July 1 By Profit & Loss A/c  
        (Loss on sale of Plant)  
      Dec.31 By Depreciation A/c  
        (On Rs.20,000 for one year)  
        By Balance c/d  
        (Rs.17,000-2,000) 15,000
    65,000     65,000
1993     1993    
Jan.1 To Balance b/d 15,000 Oct. 1 By Bank A/c 10,000
Oct.1 To Bank A/c 65,000 Oct.1 By Depreciation A/c  
        (on Rs.20,000 for nine months)  
      Oct.1 By Profit & Loss A/c  
        (Loss on sale of plant)  
      Dec.31 By Depreciation A/c  
        (On Rs.64,000 for 3 months)  
      Dec.31 By Balance c/d  
        (Rs.64,000-1,600) 62,400
    79,000     79,000
Jan. 1 To Balance b/d 62,400      

Working Notes


Balance of the Plant On Ist January, 1992
Less : Selling Price
Depreciation for 6 months, i.e, uptoIst July, 1992
Loss on sale of Plant
2. Balance of the plant on Ist January, 1993   15,000
  Less: Selling Price 10,000  
  Depreciation for 9 months, i.e., uptoIst October, 1993
Loss on sale of Plant
1,500 11,500



On 1-1-1976, a Company purchased plant and machinery for Rs.2,00,000.New machinery for Rs.10,000 was purchased on 1-10-1976 and for Rs.20,000 on 1-7-1977. On 1-4-1978, a machinery whose book value had been Rs.30,000 on 1-1-1976 was sold for Rs.16,000 and the entire amount was credited to plant and Machinery Account. Depreciation had been charged at 10% per annum on straight –line method. Show the Plant and Machinery Account from 1-1-1976 to 31-12-1978.


1976   Rs. 1976    
Jan.1 To Bank A/c   Dec.31 By Depreciation Rs.
  (i)               30,000     (i)               3,000  
  (ii)           1,70,000 2,00,000   (ii)            17,000  
Oct.1 To Bank A/c (iii) 10,000   (iii)                250 20,250
      Dec.31 By Balance c/d  
        (i)             27,000  
        (ii)         1,53,000  
        (iii)             9,750 1,89,750
1977     1977    
Jan. 1 To Balance b/d   Dec.31 By Balance c/d  
  (i)                  27,000     (i)              3,000  
  (ii)              1,53,000     (ii)           17,000  
  (iii)                  9,750 1,89,750   (iii)            1,000  
July 1 To Bank A/v (iv) 20,000  
(iv)            1,000
By Balance c/d
        (i)            24,000  
        (ii)        1,36,000  
  (iii)            8,750
(iv)          19,000
    2,09,750     2,09,750
1978     1978    
Jan.1 To Balance b/d   Apr.1 By Bank A/c 16,000
  (i)              24,000   Apr.1 By Depreciatopn A/c  
  (ii)          1,36,000
(iii)              8,750
(iv)            19,000
   (On Ist Machine for     3 Months)
By P & L A/c
    (Loss on sale of Ist Machine : Rs.24,000-16,000-750)  
      Dec.31 By Depreciation A/c  
        (i)              17,000  
        (ii)               1,000
(iii)              2,000
      Dec.31 By Balance c/d  
        (i)            1,19,000  
  (ii)                7,750
(iii)             17,000



On Ist Year April, 2000, Sonu Ltd. Purchased a Machinery for Rs.3,90,000 on Which they spent Rs.5,000 for carriage, Rs.2,000 for brokerage of the middle-man,Rs.2,500 for installation and Rs.500 for an iron pad. On Ist November,2001, they purchased another machinery for Rs. 1,00,000 and Immediately spent Rs.20,000 on its overhauling. On 30th Sept., 2002, the machinery purchased in 2000 was sold at a loss of Rs.1,27,800. The company charges depreciation @ 10% p.a on written down value basis. Accounts are closed on 31st March every year.

Prepare Machinery Account upto 31st March,2003.




2000   Rs. 2001   Rs.
April 1 To Bank A/c 3,90,000 March 31 By Depreciation A/c 40,000
April 1 To Bank A/c(Expenses)   March 31 By Balance c/d 3,60,000
  (Rs.5,000 + Rs.2,000 + Rs.2,500 + Rs.500) 10,000
2001     2002    
April 1 To Balance b/d 3,60,000 March 31 By Depreciation A/c  
Nov.1 To Bank A/c 1,00,000   (i)                  36,000  
Nov.1 To Bank A/c     (ii)                   5,000 41,000
  (Overhauling) 20,000   (for 5 months)  
      March 31 By Balance A/c  
        (i)              3,24,000  
        (ii)             1,15,000 4,39,000
    4,80,000     4,80,000
2002     2002    
April 1 To Balance b/d   Sept.30 By Bank A/c (1) 1,80,000
  (i)                    3,24,000   Sept.30 By Depreciation A/c (i)  
  (ii)                   1,15,000 4,39,000   (for 6 months) 16,200
      Sept.30 By Profit & Loss A/c  
        (Loss) 1,27,800
      March 31 By Depreciation A/c (ii) 11,500
      March 31 By Balance c/d 1,03,500
    4,39,000     4,39,000
April 1 To Balance b/d 1,03,500      


Note 1. Calculation of sale price of machinery : Rs.
  Balance on April 1, 2002 3,24,000
  Less: Depreciation for six months 16,200
  Less : Loss on Sale 1,27,800
  Sale Price 1,80,000



A company had bought Machinery for Rs.1,00,000 including therein a boiler worth Rs. 10,000. Depreciation was charged on Reducing Balance Method at the rate of 10% p.a for first five years and Machinery Account was credited accordingly. During the fifth current year, the boiler became useless on account of damages to some of its vital parts. The damaged boiler is sold for Rs.2,000. Prepare the Machinery Account for five years.



Year   Rs. Year   Rs.
Ist To Bank A/c
90,000 Ist By depreciation A/c  
  To Bank A/c (Boiler) 10,000   (i)                   9,000
(ii)                  1,000
        By Balance c/ d  
        (i)                 81,000  
        (ii)                  9,000 90,000
    1,00,000     1,00,000
2nd To Balance b/d   2nd By Depreciation A/c  
  (i)                    81,000     (i)                  8,100  
  (ii)                     9,000 90,000   (ii)                    900 9,000
        By Balance A/c  
        (i)                72,900  
        (ii)                 8,100 81,000
    90,000     90,000
3rd To Balance b/d   3rd By Depreciation A/c  
  (i)                       72,900     (i)                  7,290  
  (ii)                        8,100 81,000   (ii)                    810 8,100
        By Balance c/d  
        (i)                 65,610  
        (ii)                  7,290 72,900
    81,000     81,000
4th To Balance b/d   4th By Deprecation  
  (i)                      65,610     (i)                   6,561  
  (ii)                       7,290 72,900   (ii)                     729 7,290
        By Balance c/d  
        (i)                 59,049  
        (ii)                  6,561 65,610
    72,900     72,900
To Balance b/d
  (i)                       59,049     By Bank A/c  
  (ii)                        6,561 65,610   By Profit & Loss A/c  
           (Rs.6,561 – 2,000) 4,561
        By Depreciation A/c  
           (10% on Rs.59,049) 5,905
        By Balance c/d 53,144
    65,610     65,610

Note- It has been assumed that the boiler is sold at the commencement of fifth Year.

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