Double Declining Balance Depreciation Download Free Excel Template

by admin | Oct 18, 2023 | Bookkeeping

The best reason to use double declining balance depreciation is when you purchase assets that depreciate faster in the early years. A vehicle is a perfect example of an asset that loses value quickly in the first years of ownership. As you can see, both methods end up with the same total accumulated depreciation. The https://www.bookstime.com/ only difference between a straight-line depreciation and a double declining depreciation is the rate at which the depreciation happens. The straight-line method remains constant throughout the useful life of the asset, while the double declining method is highest on the early years and lower in the latter years.

Salvage Value and Book Value: How Double Declining Balance Depreciation Method Works

• This will help demonstrate how this method works with a tangible asset that rapidly depreciates.
• Yes, it is possible to switch from the Double Declining Balance Method to another depreciation method, but there are specific considerations to keep in mind.
• The Units of Output Method links depreciation to the actual usage of the asset.
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• The expense on the 10th year is boosted to $3,422 since we know the salvage value of the car after 10 years is $10,000 and therefore, we would expense the entire remaining undepreciated amount on the 10th year.

The difference is that DDB will use a depreciation rate that is twice that (double) the rate used in standard declining depreciation. By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year. 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 prior statement tends to be true for most fixed assets due to normal “wear and tear” from any consistent, constant usage. Because twice the straight-line rate is generally used, this method is often referred to as double-declining balance depreciation. Depreciation allows a company to deduct an asset’s declining value, reducing the amount of income on which it must pay taxes.

Example of the double declining balance method

• Suppose a company purchases a piece of machinery for $10,000, and the estimated useful life of this machinery is 5 years.
• For example, if an asset has a useful life of 10 years (i.e., Straight-line rate of 10%), the depreciation rate of 20% would be charged on its carrying value.
• It is presented as a negative number on the balance sheet in the asset section.
• Using this information, you can figure the double declining balance depreciation percentage to be ⅖ each year, or 40%.

Depreciation expense under the declining balance is calculated by applying the depreciation rate to the book value of the asset at the start of the period. 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.

Example 1: Double-Declining Depreciation in First Period

Since the depreciation is done at a faster rate (twice, to be precise) than the straight-line method, it is called accelerated depreciation. 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.

Calculating the annual depreciation expense under DDB involves a few steps. First, determine the asset’s initial cost, its estimated salvage value at the end of its useful life, and its useful life span. Then, calculate the straight-line depreciation rate and double it to find the DDB rate. double declining balance method Multiply this rate by the asset’s book value at the beginning of each year to find that year’s depreciation expense. Through this example, we can see how the DDB method allocates a larger depreciation expense in the early years and gradually reduces it over the asset’s useful life.