Advantages

This method is also simple to understand and easy to follow, though calculation of depreciation is slightly complicated. It ensures a fairly even charge to Profit and Loss Account on account of both depreciation and repairs. This is possible because the amount of depreciation decreases year after year while the charge for repairs goes on increasing year after year.

Disadvantages

One of the important limitations of this method is that the value of an asset cannot be brought down to zero. Hence, even after the asset is put out of use it may have, certain book value. This method also does not take into account the loss of interest on the money invested in the asset. The determination of a suitable rate of depreciation is also difficult under this method. The formula generally used for this purpose is as follow :

This looks quite complicated as compared to the fixed instalment method. This method is considered suitable for assets like plant and machinery where the repairs are insignificant in earlier years but increase considerably in later years. It is popularly known as 'written down value method' because the depreciation is computed on the written down value every year. There are however, other methods of computing depreciation under the diminishing balance method such as 'sum of year digits method and 'double declining balance method'. These are also called accelerated depreciation method, because under all these methods the amount of depreciation charged in earlier years is more compared to that of the later years.