Double Declining Balance: A Simple Depreciation Guide Bench Accounting

For example, if you depreciate your machine using straight line depreciation, your depreciation would remain the same each month. 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. 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.

• Therefore, by using the double-declining method, i.e., charging high depreciation expenses in initial years, the company can match the cost with the benefit derived through the use of the asset in a better way.
• Variable-declining balance uses the double-declining factor but also initiates the automatic switch to straight-line depreciation once that is greater than double-declining.
• The straight-line depreciation percentage is, therefore, 20%—one-fifth of the difference between the purchase price and the salvage value of the vehicle each year.
• If there was no salvage value, the beginning book balance value would be $100,000, with $20,000 depreciated yearly.
• Enter the straight line depreciation rate in the double declining depreciation formula, along with the book value for this year.

However, the total amount of depreciation expense during the life of the assets will be the same. For accounting, in particular, depreciation concerns allocating the cost of an asset over a period of time, usually its useful life. When a company purchases an asset, such as a piece of equipment, such large purchases can skewer the income statement confusingly. Instead of appearing as a sharp jump in the accounting books, this can be smoothed by expensing the asset over its useful life. The double-declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly.

What is Double Declining Balance Depreciation?

The DDB method is particularly useful for assets that have a higher rate of depreciation in the earlier years of their useful life, such as medical equipment. While you don’t calculate salvage value up front when calculating the double declining depreciation rate, you will need to know what it is, since assets are depreciated until they reach their salvage value. Double declining balance (DDB) depreciation is an accelerated depreciation method. DDB depreciates the asset value at twice the rate of straight line depreciation. If you compare double declining balance to straight-line depreciation, the double-declining balance method allows you a larger depreciation expense in the earlier years. Take the example above, using the double-declining balance method calculates $10,000 and $6,000 in depreciation expense in years one and two.

But you can reduce that tax obligation by writing off more of the asset early on. 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. If you’re brand new to the concept, open another tab and check out our complete guide to depreciation.

Double-Declining Balance (DDB) Depreciation Method Definition With Formula

Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own! The best way to understand how it works is to use your own numbers and try building the schedule yourself. Under the generally https://accounting-services.net/remote-bookkeepers/ 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. Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of the straight-line rate.

Sometimes, when the company is looking to defer the tax liabilities and reduce profitability in the initial years of the asset’s useful life, it is the best option for charging depreciation. In this formula, the book value is the original cost of the asset minus any accumulated depreciation. The accumulated depreciation is the total amount of depreciation expense that has been recorded for the asset over its useful life. 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.

Double Declining Balance Depreciation Method

When the depreciation rate for the declining balance method is set as a multiple, doubling the straight-line rate, the declining balance method is effectively the double-declining balance method. Over the depreciation process, the double depreciation rate remains constant and is applied to the reducing book value each depreciation period. We can understand how the depreciation expense is calculated yearly under the double-declining method from the schedule below. For example, last year, the actual depreciation expense, as per the depreciation rate, should have been $13,422 but kept at $12,108.86 to keep the asset at its estimated salvage value. So, the depreciation expense is calculated in the last year by deducting the salvage value from the opening book value. To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator.

Therefore, the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4. 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 Brigade Outsourced Accounting for Small Businesses & Non-profits term. This method takes most of the depreciation charges upfront, in the early years, lowering profits on the income statement sooner rather than later. See the screenshot below for the formulas used in the spreadsheet and the results of the MACRS half-year depreciation calculations.

How to calculate DDB depreciation

The 150% method does not result in as rapid a rate of depreciation at the double declining method. This method is more difficult to calculate than the more traditional straight-line method of depreciation. Also, most assets are utilized at a consistent rate over their useful lives, which does not reflect the rapid rate of depreciation resulting from this method. Further, this approach results in the skewing of profitability results into future periods, which makes it more difficult to ascertain the true operational profitability of asset-intensive businesses. The depreciation expense recorded under the double declining method is calculated by multiplying the accelerated rate, 36.0% by the beginning PP&E balance in each period. The formula used to calculate annual depreciation expense under the double declining method is as follows.

If you’ve taken out a loan or a line of credit, that could mean paying off a larger chunk of the debt earlier—reducing the amount you pay interest on for each period. Double declining balance depreciation isn’t a tongue twister invented by bored IRS employees—it’s a smart way to save money up front on business expenses. This approach is reasonable when the utility of an asset is being consumed at a more rapid rate during the early part of its useful life. It is also useful when the intent is to recognize more expense now, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes). By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year.