Under this method, the amount of depreciation is calculated as a fixed percentage of the reducing or diminishing value of the asset standing in the books at the beginning of the year, so as to bring down the book value of the asset to its residual value. The amount of depreciation goes on decreasing every year.

Depreciation is the reduction in the value of a tangible asset over time due to wear and tear, obsolescence, or other factors. Calculating profit and loss in depreciation by diminishing balance method is essential to determine the financial health of a business.


The diminishing balance method is a popular method of calculating depreciation. Under this method, the depreciation expense is calculated as a fixed percentage of the asset's book value at the beginning of each accounting period.


The formula for calculating depreciation under the diminishing balance method is as follows:

Depreciation expense = Book value at the beginning of the period x Depreciation rate

To calculate the profit or loss in depreciation by the diminishing balance method, you need to follow these steps:


Calculate the depreciation expense for each accounting period using the formula mentioned above.


Calculate the book value of the asset at the end of each accounting period using the formula:

Book value = Asset cost - Accumulated depreciation

To calculate the gain or loss, you need to compare the book value of the asset with its selling price. If the selling price is higher than the book value, there is a gain, and if the selling price is lower than the book value, there is a loss.


To calculate the profit or loss, subtract the original cost of the asset from the selling price and add or subtract the gain or loss calculated in step 3.


Calculating profit and loss in depreciation by the diminishing balance method is crucial for financial analysis and decision-making. By following the steps mentioned above, you can accurately determine the financial health of your business and make informed decisions.