Double Declining Balance: A Simple Depreciation Guide Bench Accounting

Even if the double declining method could be more appropriate for a company, i.e. its fixed assets drop off in value drastically over time, the straight-line depreciation method is far more prevalent in practice. The formula used to calculate annual depreciation expense under the double declining immediate annuities explained method is as follows. This method is more difficult to calculate than the more traditional straight-line method of depreciation. Also, most assets are utilized at a consistent rate over their useful lives, which does not reflect the rapid rate of depreciation resulting from this method.

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 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. The double declining balance depreciation method is a form of accelerated depreciation that doubles the regular depreciation approach.

Double Declining Balance Depreciation Method

However, note that eventually, we must switch from using the double declining method of depreciation in order for the salvage value assumption to be met. Since we’re multiplying by a fixed rate, there will continuously be some residual value left over, irrespective of how much time passes. With the constant double depreciation rate and a successively lower depreciation base, charges calculated with this method continually drop.

The result is that the depreciation expenses are larger in beginning and then get smaller over time. Because the depreciation expenses are larger in the early periods of the asset’s useful life, the
savings are greater in the beginning of the depreciation cycle and the tax benefits come sooner. Let’s assume that a retailer purchases fixtures on January 1 at a cost of $100,000. It is expected that the fixtures will have no salvage value at the end of their useful life of 10 years. Under the straight-line method, the 10-year life means the asset’s annual depreciation will be 10% of the asset’s cost. Under the double declining balance method the 10% straight line rate is doubled to 20%.

Advantages of the Declining Balance Method

This may be true with certain computer equipment, mobile devices, and other high-tech items, which are generally useful earlier on but become less so as newer models are brought to market. In contrast to straight-line depreciation, DDB depreciation is highest in the first year and then decreases over subsequent years. This makes it ideal for assets that typically lose the most value during the first years of ownership. And, unlike some other methods of depreciation, it’s not terribly difficult to implement. In earlier years, the DDB method gives a higher depreciation expense compared to the following years. The theory is that certain assets experience most of their usage, and lose most of their value, shortly after being acquired rather than evenly over a longer period of time.

The final step before our depreciation schedule under the double declining balance method is complete is to subtract our ending balance from the beginning balance to determine the final period depreciation expense. Of course, the pace at which the depreciation expense is recognized under accelerated depreciation methods declines over time. A variation on this method is the 150% declining balance method, which substitutes 1.5 for the 2.0 figure used in the calculation. The 150% method does not result in as rapid a rate of depreciation at the double declining method. Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of the straight-line rate.

Pros and cons of double declining balance

In that year, the amount to be depreciated will be the difference between the book value of the asset at the beginning of the year and its final salvage value (this is usually just a small remainder). The DDB depreciation method is best applied to assets that quickly lose value in the first few years of ownership. This is most frequently the case for things like cars and other vehicles but may also apply to business assets like computers, mobile devices and other electronics. Is a form of accelerated depreciation in which first-year depreciation is twice the amount of straight-line depreciation when a zero terminal disposal price is assumed. Because twice the straight-line rate is generally used, this method is often referred to as double-declining balance depreciation.

Double declining balance depreciation isn’t a tongue twister invented by bored IRS employees—it’s a smart way to save money up front on business expenses. Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million. Continuing with the same numbers as the example above, in year 1 the company would have depreciation of $480,000 under the accelerated approach, but only $240,000 under the normal declining balance approach. Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. This formula works for each year you are depreciating an asset, except for the last year of an asset’s useful life.

The drawbacks of double declining depreciation

Further, this approach results in the skewing of profitability results into future periods, which makes it more difficult to ascertain the true operational profitability of asset-intensive businesses. Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own! The best way to understand how it works is to use your own numbers and try building the schedule yourself. We can understand how the depreciation expense is calculated yearly under the double-declining method from the schedule below.

At the beginning of the first year, the fixture’s book value is $100,000 since the fixtures have not yet had any depreciation. Therefore, under the double declining balance method the $100,000 of book value will be multiplied by 20% and will result in $20,000 of depreciation for Year 1. The journal entry will be a debit of $20,000 to Depreciation Expense and a credit of $20,000 to Accumulated Depreciation. Every year you write off part of a depreciable asset using double declining balance, you subtract the amount you wrote off from the asset’s book value on your balance sheet.