 Hello. In this lecture, we will define declining balance method. According to fundamental accounting principles, Wilde 22nd edition, the definition of declining balance method is method that determines depreciation charge for the period by multiplying a depreciation rate, often twice the straight line rate, by the asset's beginning period book value. In order to understand a declining balance method, most common being the double declining balance method, we first need to compare that to the straight line method, and we need to understand what depreciation is in the first place, what types of assets are going to be depreciated, what is depreciation, why do we use it, what's the baseline depreciation method, straight line method, and what does declining balance method mean in relation to the normal baseline method of straight line. In order to do this, let's take a look at an example. Our example here, we have property plants and equipment, in this case, being a tank, which is going to help us to generate revenue in the future in some way. That's why it's going to be going on the books for property plants and equipment. It's going to be something we're going to use to help us generate revenue in the future. Therefore, we're going to say that we put it on the books at cost of the 257,500. It will deteriorate in value over time, and therefore we're going to have to write down the tank in some way. However, the quantity of tanks will not go down over time, meaning in year two, we will still have one tank, as opposed to inventory or supplies. It actually goes down in physical amount as time passes. Therefore, we need to make some type of estimate, and that is what we're going to do here in terms of an estimate of depreciation expense and accumulated depreciation. Therefore, in order to calculate the tank's book value, what the value is, at a later point in time, we're going to have to take the equipment, the cost, minus the accumulated depreciation. Now the question is, well, how do we come up with that estimate? The most common estimate, the baseline estimate is straight line. That's what we'll compare to on alternate estimate and declining balance. Straight line method, we would just take the cost minus the salvage value. That's what we believe we can scrap it for at the end of the useful life, bringing us to a depreciable amount of 237.5 in this case, then divide it by the useful life. How many years we believe we'll be able to use the tank for, and that will give us a straight line method of 59.375, meaning we would depreciate 59.375 each year for four years, bringing us to a cumulative depreciation of 237.500, bringing us to a book value then of 20,000. If we contrast that to a double declining method, the most common accelerated method, we could take one divided by the useful life four years. That would be the straight line rate if we didn't take into account the salvage value as we did in our example there. If we're taking out the salvage value, we're saying it's 25% straight line rate. And if we double that, we have a 50% rate, meaning the straight line rate, if we took the cost times 25%, that would be the straight line rate, not given the salvage value. And if we double that, now we have a double declining rate. So how would we then calculate the double declining balance in this case, we just take the cost times the double declining rate rather than the straight line rate, and that would give us a much higher depreciation in year one than in later years. So if we were to record that, we can see that we have a very high depreciation expense and the accumulated depreciation book value being the 257.5 minus this 128 750. If we compare the two methods, the baseline method, the straight line method, and this double declining balance and accelerated method, we can see that we have the same depreciation each year for the straight line. For the accelerated, we have higher amounts in year one than in the later years, we're accelerating, we're front loading the depreciation, the cost will be the same, of course, for each method. And the accumulated depreciation will go up at an even rate for straight line 59 375, each is what it's increasing by in this case. In terms of the double declining, it's not an even rate, we can see that we're going up at a declining rate. And in either method, we can see that we're going to end up with a book value of the salvage value. So the difference between the two methods is just timing. An accelerated method is going to front load more of the depreciation in year one and have less in the final years.