Bookkeeping

Double Declining Balance Method of Depreciation

double declining balance method formula

The double declining balance method of depreciation reports higher depreciation charges in earlier years than in later years. The higher depreciation in earlier years matches the fixed asset’s ability to perform at optimum efficiency, while lower depreciation in later years matches higher maintenance costs. However, computing the double declining depreciation is very systematic. It’s ideal to have accounting software that can calculate depreciation automatically.

This results in depreciation being the highest in the first year of ownership and declining over time. Double Declining Balance (DDB) depreciation is a method of accelerated depreciation that allows for greater depreciation expenses in the initial years of an asset’s life. Here’s the depreciation schedule for calculating the double-declining depreciation expense and the asset’s net book value for each accounting period. In case of any confusion, you can refer to the step by step explanation of the process below. The double declining balance method accelerates depreciation charges instead of allocating it evenly throughout the asset’s useful life. Proponents of this method argue that fixed assets have optimum functionality when they are brand new and a higher depreciation charge makes sense to match the fixed assets’ efficiency.

Understanding the Double Declining Balance Method

For reporting purposes, accelerated depreciation results in the recognition of a greater depreciation expense in the initial years, which directly causes early-period profit margins to decline. As a small business owner, you might find it intimidating to use the double-declining method to calculate depreciation. However, you can hire an accountant who can help you with the process, especially since you cannot afford to make any mistakes. If your company is using the double-declining balance method, the value of your assets will decline at a faster pace during the earlier years. In DDB depreciation the asset’s estimated salvage value is initially ignored in the calculations.

Accumulated depreciation is the sum of all previous years’ depreciation expenses taken over the life of an asset. It is presented as a negative number on the balance sheet in the asset section. Depreciation is the act of writing off an asset’s value over its expected useful life, and reporting it on IRS Form 4562. The double https://www.bookstime.com/industries declining balance method of depreciation is just one way of doing that. Double declining balance is sometimes also called the accelerated depreciation method. Businesses use accelerated methods when having assets that are more productive in their early years such as vehicles or other assets that lose their value quickly.

SYD is An Accelerated Method of Depreciation

For example, companies may use DDB for their fleet of vehicles or for high-tech manufacturing equipment, reflecting the rapid loss of value in these assets. If the double-declining depreciation rate is 40%, the straight-line rate of depreciation shall be its half, i.e., 20%. The carrying value of an asset decreases more quickly in its earlier years under the straight line depreciation compared to the double-declining method. Depreciation in the year of disposal if the asset is sold before its final year of useful life is therefore equal to Carrying Value × Depreciation% × Time Factor. No depreciation is charged following the year in which the asset is sold.

  • The formula used to calculate annual depreciation expense under the double declining method is as follows.
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  • The most common declining balance percentages are 150% (150% declining balance) and 200% (double declining balance).
  • Recall that the asset’s book value declines each time that depreciation is credited to the related contra asset account Accumulated Depreciation.
  • Unlike the straight-line method, the double-declining method depreciates a higher portion of the asset’s cost in the early years and reduces the amount of expense charged in later years.
  • This concept behind the DDB method matches the principle that newly purchased fixed assets are more efficient in the earlier years than in the later years.
  • Depreciation is a critical aspect when it comes to recording assets in the books of accounts.

The DDB method contrasts sharply with the straight-line method, where the depreciation expense is evenly spread over the asset’s useful life. The choice between these methods depends on the nature of the asset and the company’s financial strategies. DDB is preferable for assets that lose their value quickly, while the straight-line method is more suited for assets with a steady rate of depreciation. Owning assets in a business inevitably means depreciation will be required since nothing lasts forever, especially for fixed assets.

Formula

Under the generally accepted accounting principles (GAAP) for public companies, expenses are recorded in the same period as the revenue that is earned as a result of those expenses. Depreciation is a double declining balance method critical aspect when it comes to recording assets in the books of accounts. As a small business owner, you should hire an accountant who can help you with the complexities involved with depreciation.

double declining balance method formula

If 80 items were produced during the first month of the equipment’s use, the depreciation expense for the month will be $320 (80 items X $4). If in the next month only 10 items are produced by the equipment, only $40 (10 items X $4) of depreciation will be reported. In these cases, it may be more appropriate to use a different depreciation method, such as the Straight-Line Method or the Units of Production Method. This is the fixture’s cost of $100,000 minus its accumulated depreciation of $36,000 ($20,000 + $16,000). The book value of $64,000 multiplied by 20% is $12,800 of depreciation expense for Year 3. By reducing the value of that asset on the company’s books, a business is able to claim tax deductions each year for the presumed lost value of the asset over that year.

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