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Example of Double Declining Balance Depreciation Method
First year: The basic rate of depreciation (20%) multiplied by the book value ($50,000, same as the cost of the asset in the first year) is $10,000. Multiplied by two, the amount of depreciation claimed in the first year would be $20,000.
Then, we need to calculate the depreciation rate, explained under the next heading. In the next step, we need to multiply the beginning book value by twice the depreciation rate and deduct the depreciation expense from the beginning value to arrive at the remaining value. We will repeat a similar process each year throughout the asset’s useful life or until we reach the asset’s salvage value. The double-declining balance method is one of the depreciation methods used in entities nowadays. It is an accelerated depreciation method that depreciates the asset value at twice the rate in comparison to the depreciation rate used in the straight-line method. Depreciation is charged on the opening book value of the asset in the case of this method.
Calculating DDB depreciation may seem complicated, but it can be easy to accomplish with accounting software. This can make profits seem abnormally low, but this isn’t necessarily an issue if the business continues to buy and depreciate new assets on a continual basis over the long term. In the second year, depreciation is calculated in a regular way by multiplying the remaining book value of $36,000 ($40,000 — $4,000) by 40%. Because the book value declines as the asset ages and the rate stays constant, the depreciation charge falls each year. Under straight-line depreciation, the depreciation expense would be $4,600 annually—$25,000 minus $2,000 x 20%.
Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
Double declining balance is useful for assets, such as vehicles, where there is a greater loss in value upfront. Additionally, it more quickly provides your business with a greater deprecation deduction on your taxes. With your second year of depreciation totaling $6,720, that leaves a book value of $10,080, which will be used when calculating your third year of depreciation. The following table illustrates double declining depreciation totals for the truck.
Starting off, your book value will be the cost of the asset—what you paid for the asset. Hence, our calculation of the depreciation expense in Year 5 – the final year of our fixed asset’s useful life – differs from the prior periods. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. In other words, it records how the value of an asset declines over time. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time.
If something unforeseen happens down the line—a slow year, a sudden increase in expenses—you may wish you’d stuck to good old straight line depreciation. While double declining balance has its money-up-front appeal, that means your tax bill goes up in the future. (You can multiply it by 100 to see it as a percentage.) This is also called the straight line depreciation rate—the percentage of an asset you depreciate each year if you use the straight line method.
On April 1, 2011, Company A purchased an equipment at the cost
of $140,000. At the end
of the 5th year, the salvage value (residual value) will be $20,000. Calculate the depreciation
expenses for 2011, 2012 and 2013 using double declining balance depreciation
method. In the Declining Balance method, LN calculates each
year’s total depreciation by applying a constant percentage to the asset’s net
book value. The declining balance methods allocate the largest portion of an
asset’s cost to the early years of its useful life. In the double-declining method, depreciation expenses are larger in the early years of an asset’s life and smaller in the latter portion of the asset’s life.
The DDB method records larger depreciation expenses during the earlier years of an asset's useful life, and smaller ones in later years. As a result, companies opt for the DDB method for assets that are likely to lose most of their value early on, or which will become obsolete more quickly.