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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Under the diminishing balance method, which statement is correct about the depreciation charge over the life of an asset, assuming no additions or disposals?

The depreciation charge decreases each year. In the diminishing balance method a fixed percentage is applied to the opening written down value, which reduces every year after depreciation is deducted, so the amount charged becomes smaller over time, unlike the constant charge under the straight line method.

  1. AIt remains constant every year
  2. BIt increases every year as the asset ages
  3. CIt decreases every year because it is computed on a falling book valueCorrect
  4. DIt is nil in the first year

Explanation

The fixed percentage is applied to the opening written down value, which falls each year. Hence the annual charge declines. A constant charge belongs to the straight line method.

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