|Diminishing balance method|
A method of calculating depreciation. The cost or agreed value of the asset is written off over its expected life by the application of a percentage to the written down value. The percentage is calculated so that the asset will be written down to scrap value after a stated number of years. The annual depreciation is charged against profit. This method means that much higher charges are made in the initial years, thus reducing profit artificially. It may also tend to show the value of assets at an artificially low the value of assets at an artificially low the true capital employed for the purpose of calculating certain ratios.
|Reference: The Penguin Business Dictionary, 3rd edt.|