The Double Declining Balance Depreciation Method

Consider a widget manufacturer that purchases a $200,000 packaging machine with an estimated salvage value of $25,000 and a useful life of five years. Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. Typically, accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double declining. For instance, in the fourth year of our example, you’d depreciate $2,592 using the double declining method, or $3,240 using straight line. Now you’re going to write it off your taxes using the double depreciation balance method.

Due to the accelerated depreciation expense, a company’s profits don’t represent the actual results because the depreciation has lowered its net income. If you’ve ever wondered why your shiny new car takes a huge value hit the first few years you own it, you’re not alone. This form of accelerated depreciation, known as Double Declining Balance (DDB) depreciation, is actually common method companies use to account for the expense of a long-lived asset.

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. Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year. Over the last year no formula is applied, since the remaining book value is attributed to depreciation expenses.

A Guide To The Double Declining Balance (DDB) Depreciation Method

Enter the straight line depreciation rate in the double declining depreciation formula, along with the book value for this 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. There are various alternative methods that can be used for calculating a company’s annual depreciation expense.

  • The DDB method is particularly relevant in industries where assets depreciate rapidly, such as technology or automotive sectors.
  • Note that the estimated salvage value of $8,000 was not considered in calculating each year’s depreciation expense.
  • Assume that you’ve purchased a $100,000 asset that will be worth $10,000 at the end of its useful life.
  • One way of accelerating the depreciation expense is the double decline depreciation method.
  • In this scenario, we can use the formula to calculate the depreciation expense for the first year.

For accounting purposes, companies can use any of these methods, provided they align with the underlying usage of the assets. For tax purposes, only prescribed methods by the regional tax authority is allowed. 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 you can see, the depreciation rate is multiplied by the asset book value every year to compute the deprecation expense. To calculate the depreciation rate for the DDB method, typically, you double the straight-line depreciation rate.

Example of the double declining balance method

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 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.

And the rate of depreciation is defined according to the estimated pattern of an asset’s use over its useful life. 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.

Example of Double-Declining-Balance Depreciation

Unlike straight line depreciation, which stays consistent throughout the useful life of the asset, double declining balance depreciation is high the first year, and decreases each subsequent year. To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator. It’s a good way to see the formula in action—and understand what kind of impact double declining depreciation might have on your finances.

The drawbacks of double declining depreciation

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. The next step is to calculate the straight-line depreciation expense, which is equal to the difference between the PP&E purchase price and salvage value (i.e. the depreciable base) divided last-in first-out lifo method in a perpetual inventory system by the useful life assumption. 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 years–that is, $30,000 minus $3,000, divided by 10. Also in certain cases such method is allowed to defer recognition of profit to later periods, for example for corporate income tax purposes.

And, unlike some other methods of depreciation, it’s not terribly difficult to implement. Doing some market research, you find you can sell your five year old ice cream truck for about $12,000—that’s the salvage value. To create a depreciation schedule, plot out the depreciation amount each year for the entire recovery period of an asset.

We can incorporate this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12. However, when it comes to taxable income and the related income tax payments, it is a different story. In the U.S. companies are permitted to use straight-line depreciation on their income statements while using accelerated depreciation on their income tax returns. Under the DDB depreciation method, book value is an important part of calculating an asset’s depreciation, as you’ll need to know the asset’s original book value to calculate how it will depreciate over time.

What is the double declining depreciation rate?

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. Assume a company purchases a piece of equipment for $20,000 and this piece of equipment has a useful life of 10 years and a salvage value of $1,000. The depreciation rate would be calculated by multiplying the straight-line rate by two. In this case the straight-line rate would be 100 percent divided by the asset useful life or 10 percent. The DDB method contrasts sharply with the straight-line method, where the depreciation expense is evenly spread over the asset’s useful life.