Double Declining Balance Depreciation Method, Guide

This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset. Declining Balance Depreciation is an accelerated cost recovery (expensing) of an asset that expenses higher amounts at the start of an assets life and declining amounts as the class life passes. The amount used to determine the speed of the cost recovery is based on a percentage. The most common declining balance percentages are 150% (150% declining balance) and 200% (double declining balance). Because most accounting textbooks use double declining balance as a depreciation method, we’ll use that for our sample asset.

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 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. The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher. Depreciation rates between the two methods of calculating depreciation are similar except that the DDD Rate is twice the value of the SLD rate.

Sum-of-the-Years’ Digits Method

This method is simpler and more conservative in its approach, as it does not account for the front-loaded wear and tear that some assets may experience. While it may not reflect an asset’s actual condition as precisely, it is widely used for its simplicity and consistency. To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator.

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 double declining balance depreciation rate is twice what straight https://www.bookstime.com/ line depreciation is. For example, if you depreciate your machine using straight line depreciation, your depreciation would remain the same each month. Double declining balance (DDB) depreciation is an accelerated depreciation method.

Double Declining Balance Depreciation Template

So, in the first year, the company would record a depreciation expense of $4,000. As a result, at the end of the first year, the book value of the machinery would be reduced to $6,000 ($10,000 – $4,000). See the screenshot below for the facts of the asset we will depreciate using the variable-declining balance for the MACRS half-year convention.

The depreciation rates in DDD balance methods could either be 150% or 200% or even 250% of the SLD method. The declining balance technique represents the opposite of the straight-line depreciation method, which is more suitable for assets whose book value drops at a steady rate throughout their useful lives. This method simply subtracts the salvage value from the cost of the asset, which is then divided by the useful life of the asset.

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The carrying value of an asset decreases more quickly in its earlier years under the straight line depreciation compared to the double-declining method. 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. 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.

However, it is crucial to note that tax regulations can vary from one jurisdiction to another. Therefore, businesses should verify the specific tax rules and regulations in their region and consult with tax experts to ensure compliance. This can make profits seem abnormally low, but this isn’t necessarily an issue if the business continues to buy and depreciate new assets on a continual basis over the long term. Next year when you do your calculations, the book value of the ice cream truck will be $18,000. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

As years go by and you deduct less of the asset’s value, you’ll also be making less income from the asset—so the two balance out. Your basic depreciation rate is the rate at which an asset depreciates using the straight line method. double declining balance method 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.

In year 5, companies often switch to straight-line depreciation and debit Depreciation Expense and credit Accumulated Depreciation for $6,827 ($40,960/6 years) in each of the six remaining years. Therefore, the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4. Businesses choose to use the Double Declining Balance Method when they want to accurately reflect the asset’s wear and tear pattern over time.