Double Declining Balance: A Simple Depreciation Guide Bench Accounting

Understanding how to calculate and apply this method can provide valuable insights into asset management and financial planning. A double-declining balance depreciation method is an accelerated depreciation method that can be used to depreciate the asset’s value over the useful life. It is a bit more complex than the straight-line method of depreciation but is useful for deferring tax payments and maintaining low profitability in the early years. The Double Declining Balance Method (DDB) is a form of accelerated depreciation in which the annual depreciation expense is greater during the earlier stages of the fixed asset’s useful life. Double declining balance depreciation is an accelerated depreciation method that charges twice the rate of straight-line deprecation on the asset’s carrying value at the start of each accounting period. Depreciation is a fundamental concept in accounting, representing the allocation of an asset’s cost over its useful life.

Double Declining Balance Depreciation: Formula & Calculation

• It’s ideal for assets that quickly lose their value or inevitably become obsolete.
• When the depreciation rate for the declining balance method is set as a multiple, doubling the straight-line rate, the declining balance method is effectively the double-declining balance method.
• The accounting concept behind depreciation is that an asset produces revenue over an estimated number of years; therefore, the cost of the asset should be deducted over those same estimated years.
• It was first enacted and authorized under the Internal Revenue Code in 1954, and it was a major change from existing policy.

It is particularly suitable for assets whose usage varies significantly from year to petty cash year. This approach ensures that depreciation expense is directly tied to an asset’s production or usage levels. This process continues for each subsequent year, recalculating the depreciation expense based on the declining book value.

Benefits of the Double Declining Balance Method

This is to ensure that we do not depreciate an asset below the amount we can recover by selling it. As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 Bookkeeping for Chiropractors years–that is, $30,000 minus $3,000, divided by 10. Simultaneously, you should accumulate the total depreciation on the balance sheet.

Offset the Maintenance Costs

• Since the depreciation is done at a faster rate (twice, to be precise) than the straight-line method, it is called accelerated depreciation.
• Our editorial team independently evaluates products based on thousands of hours of research.
• Under the declining balance method, depreciation is charged on the book value of the asset and the amount of depreciation decreases every year.
• To create a depreciation schedule, plot out the depreciation amount each year for the entire recovery period of an asset.
• The overall expensed amount will be the same; however, it will be more in the earlier years and less later.

All physical assets run across decreasing their value over a period of time due to continuous use, deterioration, or obsolescence. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The articles and research support materials available on this site double declining balance method are educational and are not intended to be investment or tax advice.

Which of these is most important for your financial advisor to have?

If, for example, an asset is purchased on 1 December and the financial statements are prepared on 31 December, the depreciation expense should only be charged for one month. In the accounting period in which an asset is acquired, the depreciation expense calculation needs to account for the fact that the asset has been available only for a part of the period (partial year). The following section explains the step-by-step process for calculating the depreciation expense in the first year, mid-years, and the asset’s final year. This is because, unlike the straight-line method, the depreciation expense under the double-declining method is not charged evenly over the asset’s useful life. In this lesson, I explain what this method is, how you can calculate the rate of double-declining depreciation, and the easiest way to calculate the depreciation expense. An asset for a business cost $1,750,000, will have a life of 10 years and the salvage value at the end of 10 years will be $10,000.

• By contrast, the opposite is true when applying the straight-line method, the unit-of-production method, and the sum-of-the-years-digits 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 the accounting period in which an asset is acquired, the depreciation expense calculation needs to account for the fact that the asset has been available only for a part of the period (partial year).
• By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year.
• The maintenance costs would be deducted from the organization’s reported benefits.

In simple terms, Book value is the cost you paid while purchasing the asset. Insights on business strategy and culture, right to your inbox.Part of the business.com network. Business News Daily provides resources, advice and product reviews to drive business growth. Our mission is to equip business owners with the knowledge and confidence to make informed decisions. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Ask a question about your financial situation providing as much detail as possible.

Double Declining Balance Method

By automating the complex calculations required for methods like DDB, AI ensures accuracy and saves valuable time. These tools can quickly adjust book values, generate detailed financial reports, and adapt to various depreciation methods as needed. Next, divide the annual depreciation expense (from Step 1) by the purchase cost of the asset to find the straight line depreciation rate. First, determine the annual depreciation expense using the straight line method. This is done by subtracting the salvage value from the purchase cost of the asset, then dividing it by the useful life of the asset.