An equipment costing ₦9,000 has an estimated residual value of ₦900, and is depreciated at 10% per annum. What is the depreciation charge for the…

Explanation

Using the diminishing balance method (also called reducing balance), depreciation is calculated on the remaining book value each year. The rate is applied to a decreasing balance.

Year 1: Depreciation = ₦9,000 × 10% = ₦900. Book Value at end = ₦9,000 – ₦900 = ₦8,100.

Year 2: Depreciation = ₦8,100 × 10% = ₦810. Book Value at end = ₦8,100 – ₦810 = ₦7,290.

Year 3: Depreciation = ₦7,290 × 10% = ₦729.

This method results in higher depreciation in early years and lower depreciation in later years. It is suitable for assets that lose more value when new (like vehicles or technology equipment). Notice how each year’s depreciation is exactly 10% less than the previous year’s.