Double Declining Balance Depreciation: Formula & Calculation

Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time. However, the company needs to use the salvage value in order to limit the total depreciation the company charges to the income statements. In other words, the depreciation in the declining balance method will stop when the net book value of the fixed Cash Flow Management for Small Businesses asset equals the salvage value. As the declining balance depreciation uses the net book value in the calculation, the company doesn’t need to determine the depreciable cost like other depreciation methods. In other words, unlike other depreciation methods, the salvage value is ignored completely when the company calculates the declining balance depreciation.

What are the Main Types of Depreciation Methods?

In contrast to straight-line depreciation, DDB depreciation is highest in the first year and then decreases over subsequent years. This makes it ideal for assets that typically lose the most value during the first years of ownership. Given its nature, the DDB depreciation method is best reserved for assets that depreciate rapidly in the first several years of ownership, such double declining depreciation method 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. 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. Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the asset’s utility is consumed at a more rapid rate during the earlier phases of its useful life.

When is the Double Declining Method used?

Businesses use accelerated methods when having assets that are more productive in their early years such as vehicles or other assets that lose their value quickly. The latter two are considered accelerated depreciation methods because they can be used by a company to claim greater depreciation expense in the early years of the asset’s useful life. At the end of an asset’s useful life, the total accumulated depreciation adds up to the same amount under all depreciation methods. Accumulated depreciation is the sum of all previous years’ depreciation expenses taken over the life of an asset.

Calculating Double Declining Balance Depreciation

The DDB method accelerates depreciation, allowing businesses to write off the cost of an asset more quickly in the early years, which can be incredibly beneficial for tax purposes and financial planning. 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 trial balance double declining method, or $3,240 using straight line.

How do I calculate depreciation percentage?

Standard declining balance uses a fixed percentage, but not necessarily double. Both methods reduce depreciation expense over time, but DDB does so more rapidly. To illustrate the double declining balance method in action, let’s use the example of a car leased by a company for its sales team. This will help demonstrate how this method works with a tangible asset that rapidly depreciates. Explore the double declining balance method for depreciation, focusing on calculation, adjustments, and financial reporting insights. The most basic type of depreciation is the straight line depreciation method.

• The depreciation expense will be lower in the later years compared to the straight-line depreciation method.
• This gives you the annual depreciation rate if you were using the straight-line method.
• This means businesses can reflect actual wear and tear in their financial statements, helping them plan expenses and taxes more effectively.
• This method is most suitable for assets and equipment that can be expected to become useless and obsolete within a few years such as technology products.
• To illustrate the double declining balance method in action, let’s use the example of a car leased by a company for its sales team.

• Continuing to use the 40-percent rate gives you $2,400 of depreciation in the second year, which is recorded as a debit to depreciation expense and a credit to accumulated depreciation.
• For example, a delivery truck can only go so many miles before it is worn out, or used up.
• For comparison’s sake, this is what XYZ Company would book for depreciation expense every year under the straight line depreciation method versus double declining balance depreciation method.
• By automating the complex calculations required for methods like DDB, AI ensures accuracy and saves valuable time.
• We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.

Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support. We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month. 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. Instead of multiplying by our fixed rate, we’ll link the end-of-period balance in Year 5 to our salvage value assumption.

What is An Accelerated Depreciation Method?

One way of accelerating the depreciation expense is the double decline depreciation method. However, when the depreciation rate is determined this way, the method is usually called the double-declining balance depreciation method. Though, the double-declining balance depreciation is still the declining balance depreciation method. Each year, when you record depreciation expenses, it lowers your business’s reported income, potentially reducing your taxes.