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. 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. 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. In the first year of service, you’ll write $12,000 off the value of your ice cream truck. It will appear as a depreciation expense on your yearly income statement.

  1. However, over the course of an asset’s useful life, its book value will change each year as it depreciates.
  2. This method accelerates straight-line method by doubling the straight-line rate per year.
  3. That is less than the $5,000 salvage value determined at the beginning of the asset’s useful life.

If the double-declining depreciation rate is 40%, the straight-line rate of depreciation shall be its half, i.e., 20%. Double-declining depreciation charges lesser depreciation in the later years of an asset’s life. 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. Under straight line depreciation, XYZ Company would recognize $3,000 in depreciation expense each year. Assume that you’ve purchased a $100,000 asset that will be worth $10,000 at the end of its useful life.

Example of the double declining balance method

Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability in the first few years after purchasing them. Suppose a company purchases a piece of machinery for $10,000, and the estimated useful life of this machinery is 5 years. In this scenario, we can use the formula to calculate the depreciation expense for the first year. 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. You calculate 200% of the straight-line depreciation, or a factor of 2, and multiply that value by the book value at the beginning of the period to find the depreciation expense for that period.

Adjustments and Exceptions in DDB Calculation

For investors, they want deprecation to be low (to show higher profits). The formula used to calculate annual depreciation expense under the double declining method is as follows. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life.

What is the double declining balance method of depreciation?

Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset. Accelerated depreciation methods, such as double declining balance (DDB), means there will be higher depreciation expenses double declining balance method in the first few years and lower expenses as the asset ages. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset. Depreciation is the act of writing off an asset’s value over its expected useful life, and reporting it on IRS Form 4562.

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. 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. The declining balance method, also known as the reducing balance method, is ideal for assets that quickly lose their values or inevitably become obsolete. This is classically true with computer equipment, cell phones, and other high-tech items, which are generally useful earlier on but become less so as newer models are brought to market. An accelerated method of depreciation ultimately factors in the phase-out of these assets. The MACRS method for short-lived assets uses the double declining balance method but shifts to the straight line (S/L) method once S/L depreciation is higher than DDB depreciation for the remaining life.

At the beginning of the second year, the fixture’s book value will be $80,000, which is the cost of $100,000 minus the accumulated depreciation of $20,000. When the $80,000 is multiplied by 20% the result is $16,000 of depreciation for Year 2. If you’re brand new to the concept, open another tab and check out our complete guide to depreciation. Then come back here—you’ll have the background knowledge you need to learn about double declining balance. The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher.

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. The carrying value of an asset decreases more quickly in its earlier years under the straight line depreciation compared to the double-declining method. To calculate the double-declining depreciation expense for Sara, we first need to figure out the depreciation rate. In the last year of an asset’s useful life, we make the asset’s net book value equal to its salvage or residual value. This is to ensure that we do not depreciate an asset below the amount we can recover by selling it.

The drawbacks of double declining depreciation

The biggest thing to be aware of when calculating the double declining balance method is to stop depreciating the asset when you arrive at the salvage value. That is less than the $5,000 salvage value determined at the beginning of the asset’s useful life. Note, there is no depreciation expense in years 4 or 5 under the double declining balance method. The key to calculating the double declining balance method is to start with the beginning book value– rather than the depreciable base like straight-line depreciation. The beginning book value is multiplied by the doubled rate that was calculated above. The depreciation expense is then subtracted from the beginning book value to arrive at the ending book value.

The Double Declining Balance Method has several advantages:

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics https://accounting-services.net/ and behavioral finance. 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.

Note that the estimated salvage value of $8,000 was not considered in calculating each year’s depreciation expense. In our example, the depreciation expense will continue until the amount in Accumulated Depreciation reaches a credit balance of $92,000 (cost of $100,000 minus $8,000 of salvage value). He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University.

Net income will be lower for many years, but because book value ends up being lower than market value, this ultimately leads to a bigger gain when the asset is sold. If this asset is still valuable, its sale could portray a misleading picture of the company’s underlying health. Therefore, the DDB depreciation calculation for an asset with a 10-year useful life will have a DDB depreciation rate of 20%. In the first accounting year that the asset is used, the 20% will be multiplied times the asset’s cost since there is no accumulated depreciation. In the following accounting years, the 20% is multiplied times the asset’s book value at the beginning of the accounting year. This differs from other depreciation methods where an asset’s depreciable cost is used.

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