Explaining the Effects of the Declining-Balance Depreciation vs. Straight-Line Method
Take note that in the declining balance depreciation, the 1st year depreciation cost is $1,000, which decreases as the years progress until the NBV reaches the scrap value amount.
If one is to use the straight-line method, the entire 5 years of estimated useful life will recognize a uniform depreciation cost of $700. This is derived via the following computation:
Straight-line depreciation per year = ($5,000 - $1,500) / 5 years = $700
Hence, the first two years of allocated cost using the declining balance method is $1,800, which is higher than $1,400 ($700 x 2 years) if the straight-line method were used. The rationale for this computation is that the use of the asset is more extensive during the earlier years; hence, the allocated cost is higher.
As the fixed asset ages through the passing of its estimated useful life, the company incurs additional costs related to the use of said fixed asset, by way of repairs and maintenance costs. Thus, the burden of the allocated costs likewise decrease in later years because the fixed asset’s contribution is no longer as significant as it was in the earlier years of its estimated useful life.
However, based on the accounting study guide issued for US GAAP explanation, the modified 200% or 150% declining balance is more acceptable.
Readers can find the explanation and examples for the 200% Declining Balance Method in a separate article entitled “Double-Declining Depreciation: Explanation & Examples."