Double Declining Balance Method: A Depreciation Guide

Double Declining BalanceIn declining balance method of depreciation or reducing balance method, assets are depreciated at a higher rate in the initial years than in the subsequent years. A constant https://www.bookstime.com/ depreciation rate is applied to an asset’s book value each year, heading towards accelerated depreciation. This method depreciates assets at twice the rate of the straight-line method.

• The most commonly used method of depreciation is straight-line; it is the simplest to calculate.
• The company is less profitable in the early years than in later years; thus, it will be difficult to measure its true operational profitability.
• Company A recognizes depreciation to the nearest whole month.
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• 1- You can’t use double declining depreciation the full length of an asset’s useful life.

Recall that the asset’s book value declines each time that depreciation is credited to the related contra asset account Accumulated Depreciation. Over the life of the equipment, the maximum total amount of depreciation expense is $10,000. However, the amount of depreciation expense in any year depends on the number of images. Imagine that we have a company called Linear Dynamic that purchased a vehicle for $60,000. This vehicle is estimated to have a useful life of 5 years and a salvage value of $5,000. The accountants at Linear Dynamic will calculate the DDBD for the vehicle using the following values. The cost of the truck including taxes, title, license, and delivery is $28,000.

Alternative Methods

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. Now, $ 25,000 will be charged to the income double declining balance method statement as a depreciation expense in the first year, $ 18,750 in the second year, and so on for eight continuous years. Although all the amount is paid for the machine at the time of purchase, the expense is charged over time. Generally, the efficiency of the assets is higher when they are purchased.

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 double-declining balance depreciation 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.

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Take the $100,000 asset acquisition value and subtract the $10,000 estimated salvage value. With this method, you make a special adjustment in the final year to bring the asset to salvage value. Don’t have the cash or desire to purchase equipment outright? Use the formula above to determine your depreciation for the first year. This is an estimate of the asset’s value at the end of its useful life.

• 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.
• This vehicle is estimated to have a useful life of 5 years and a salvage value of $5,000.
• Under the DDB method, we don’t consider the salvage value in computing annual depreciation charges.
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With our straight-line depreciation rate calculated, our next step is to simply multiply that straight-line depreciation rate by 2x to determine the double declining depreciation rate. The steps to determine the annual depreciation expense under the double declining method are as follows. Depreciation is an accounting process by which a company allocates an asset’s cost throughout itsuseful life.