Major drawbacks or disadvantages of diminishing balance or reducing balance method of providing depreciation can be described as follows:
1. Not Suitable For All Assets
Diminishing balance method of provision of depreciation is not suitable or applicable for less valued assets having short life. It is suitable only for valuable assets having long life.
2. Loss Of Interest
In this method of depreciation, deducted depreciation amount of previous is not invested outside. So, the company does not earn any interest or revenue from it. So, interest is lost on capital investment.
3. Higher Rate
Diminishing balance method requires higher depreciation rate to recover the cost of assets.
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Also Read:
4. Book Value
In diminishing balance method, value of asset cannot be written off. The book value of asset never become zero.
5. Difficulty In Calculation
Under this method, there is no uniformity in depreciation amount. It is difficult to obtain the exact rate of depreciation.
