Double declining balance depreciation allows for higher depreciation expenses in early years and lower expenses as an asset nears the end of its life. The depreciation of assets can meaningfully impact the bottom line of any business, and the double declining balance method is one of many strategies for assessing it. You can avoid the hassle of doing these calculations yourself and prevent any costly accounting mistakes by enlisting the help of an experienced bookkeeper. With professional accounting expertise on your side, you can be confident that your capital is properly accounted for and that your business is on the right track. Contact BooksTime to find out more about bookkeeping services that can help you take your business to the next level while saving you valuable time and money. In the double-declining method, depreciation expenses are larger in the early years of an asset’s life and smaller in the latter portion of the asset’s life.
- Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.
- Because the book value decreases each period, the depreciation expense decreases as well.
- Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment.
- Accountants need to analyze depreciation of an asset over the entire useful life of the asset.
- This is one reason US GAAP has not permitted the fair valuing of long-lived assets.
- When the $80,000 is multiplied by 20% the result is $16,000 of depreciation for Year 2.
At the beginning of the second year, the fixture’s book value will be $80,000, which is the cost of $100,000 minus the accumulated depreciation of $20,000. When the $80,000 is multiplied by 20% the result is $16,000 of depreciation for Year 2. Any mischaracterization of asset usage is not proper GAAP and is not proper accrual accounting. Under IRS rules, vehicles are depreciated over a 5 year recovery period.
When to use the double declining balance depreciation method
Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Don’t worry—these formulas are a lot easier to understand with a step-by-step example.
- Following GAAP and the expense recognition principle, the depreciation expense is recognized over the asset’s estimated useful life.
- For example, this method could account for depreciation of a printing press for which the depreciable base is $48,000 (as in the straight-line method), but now the number of pages the press prints is important.
- With professional accounting expertise on your side, you can be confident that your capital is properly accounted for and that your business is on the right track.
- The formula used to calculate annual depreciation expense under the double declining method is as follows.
For example, assume your business purchases a delivery vehicle for $25,000. Vehicles fall under the five-year property class according to the Internal Revenue Service (IRS). 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.
It is an accelerated depreciation method that depreciates the asset value at twice the rate in comparison to the depreciation rate used in the straight-line method. Depreciation is charged on the opening book value of the asset in the case of this method. The “double” means 200% of the straight line rate of depreciation, while the “declining balance” refers to the asset’s book value or carrying value at the beginning of the accounting period. However, over the depreciable life of the asset, the total depreciation expense taken will be the same, no matter which method the entity chooses. For example, in the current example both straight-line and double-declining-balance depreciation will provide a total depreciation expense of $48,000 over its five-year depreciable life. Each year, the accumulated depreciation balance increases by $9,600, and the press’s book value decreases by the same $9,600.
Example of Double Declining Balance Depreciation
Sara wants to know the amounts of depreciation expense and asset value she needs to show in her financial statements prepared on 31 December each year if the double-declining method is used. 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. Another thing to remember while calculating the depreciation expense for the first year is the time factor. 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. In this lesson, I explain what this method is, how you can calculate the rate of double-declining depreciation, and the easiest way to calculate the depreciation expense.
Accounting concept
Companies can (and do) use different depreciation methods for each set of books. For investors, they want deprecation to be low (to show higher profits). Depreciation calculations require a lot of record-keeping if done for each asset a business owns, especially if assets are added to after they are acquired, or partially disposed of. However, many tax systems permit all assets of a similar type acquired in the same year to be combined in a “pool”. Depreciation is then computed for all assets in the pool as a single calculation.
What is the double declining balance method of depreciation?
Under US GAAP, this is how this building would appear in the balance sheet. Even if the fair value of the building is $875,000, the building would still appear on the balance sheet at its depreciated historical cost of $800,000 under US GAAP. Alternatively, if the company used IFRS and elected to carry real estate on the balance sheet at fair value, the building would appear on the company’s balance sheet at its new fair value of $875,000. One unique feature of the double-declining-balance method is that in the first year, the estimated salvage value is not subtracted from the total asset cost before calculating the first year’s depreciation expense.
(An example might be an apple tree that produces fewer and fewer apples as the years go by.) Naturally, you have to pay taxes on that income. 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. To calculate the double-declining depreciation expense for Sara, we first need to figure out the depreciation rate.
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 formula for calculating DDB begins with a calculation of the basic depreciation rate, or the rate at which a holding depreciates using the straight line technique. Cost generally is the amount paid for the asset, including all costs related to acquiring and bringing the asset into use.[7] In some countries or for some purposes, salvage value may be ignored. The rules of some countries specify lives and methods to be used for particular types of assets. However, in most countries the life is based on business experience, and the method may be chosen from one of several acceptable methods.
Your basic depreciation rate is the rate at which an asset depreciates using the straight line method. An exception to this rule is when an asset is disposed before its final year of its useful life, i.e. in one of its middle years. In that case, we will charge depreciation only for the time the asset was still in use (partial year). Like in the first year calculation, we will use a time factor for the number of months the asset was in use but multiply it by its carrying value at the start of the period instead of its cost. Since the assets will be used throughout the year, there is no need to reduce the depreciation expense, which is why we use a time factor of 1 in the depreciation schedule (see example below).
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. With your second year of depreciation totaling $6,720, that leaves a book value of $10,080, which will be used employer’s liability for employment taxes when calculating your third year of depreciation. The following table illustrates double declining depreciation totals for the truck. The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher.
By accelerating the depreciation and incurring a larger expense in earlier years and a smaller expense in later years, net income is deferred to later years, and taxes are pushed out. Suppose an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units. Now that we have a beginning value and DDB rate, we can fill up the 2022 depreciation expense column. To use the template above, all you need to do is modify the cells in blue, and Excel will automatically generate a depreciation schedule for you.
Accountants know that different assets depreciate at different rates depending on their usefulness, lifespan, and currency. They have several methods at their disposal and choose depending on the asset at hand. One of the most common choices is the double declining balance method of depreciation (DDB). Since double-declining-balance depreciation does not always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset’s life.
