Explanation

Under the diminishing balance method (also called reducing balance or written down value method), depreciation is calculated on the book value at the start of each year, not the original cost.

Year 1 calculation: Depreciation = Cost × Rate = ₦120,000 × 40% = ₦48,000. Book value at end of Year 1 = ₦120,000 – ₦48,000 = ₦72,000.

Year 2 calculation: Depreciation = Book Value × Rate = ₦72,000 × 40% = ₦28,800.

This method charges higher depreciation in early years when the asset is new and more productive, and lower amounts in later years. Each year, the depreciation amount reduces because it is calculated on a smaller book value. This differs from straight-line method which charges the same amount each year.