The Double Declining Depreciation Method: A Beginner’s Guide
The prior statement tends to be true for most fixed assets due to normal “wear and tear” from any consistent, constant usage. Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. The difference is that DDB will use a depreciation rate that is twice that (double) the rate used in standard declining depreciation. The table below illustrates the units-of-production depreciation schedule of the asset. If the beginning book value is equal (or almost equal) with the salvage value, don’t apply the DDB rate. Instead, compute the difference between the beginning book value and salvage value to compute the depreciation expense.
Calculating DDB depreciation may seem complicated, but it can be easy to accomplish with accounting software. To see which software may be right for you, check out our list of the best accounting software or some of our individual product reviews, like our Zoho Books review and our Intuit QuickBooks accounting software review. 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. And, unlike some other methods of depreciation, it’s not terribly difficult to implement. 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.
But as time goes by, the fixed asset may experience problems due to wear and tear, which would result in repairs and maintenance costs. That’s why depreciation expense is lower in the later years because of the fixed asset’s decreased efficiency and high maintenance cost. FitBuilders estimates that the residual or salvage value at the end of the fixed asset’s life is $1,250. Since we already have an ending book value, let’s squeeze in the 2026 depreciation expense by deducting $1,250 from $1,620.
Double Declining Balance Method Calculator – Excel Template
It’s a good way to see the formula in action—and understand what kind of impact double declining depreciation might have on your finances. Every year you write off part of a depreciable asset using double declining balance, you subtract the amount you wrote off from the asset’s book value on your balance sheet. Starting off, your book value will be the cost of the asset—what you paid for the asset. On the other hand, double declining balance decreases over time because you calculate it off the beginning book value each period. It does not take salvage value into consideration until you reach the final depreciation period. You calculate it based on the difference between your cost basis in the asset—purchase price plus extras like sales tax, shipping and handling charges, and installation costs—and its salvage value.
The beginning book value is the cost of the fixed asset less any depreciation claimed in prior periods. Under the DDB method, we don’t consider the salvage value in computing annual depreciation charges. Instead, we simply keep deducting depreciation until we reach the salvage value. Start by computing the DDB rate, which remains constant throughout the useful life of the fixed asset. However, depreciation expense in the succeeding years declines because we multiply the DDB rate by the undepreciated basis, or book value, of the asset. He estimates that he can use this machine for five years or 100,000 presses, and that the machine will only be worth $1,000 at the end of its life.
- While some accounting software applications have fixed asset and depreciation management capability, you’ll likely have to manually record a depreciation journal entry into your software application.
- If you’re brand new to the concept, open another tab and check out our complete guide to depreciation.
- As with the straight-line example, the asset could be used for more than five years, with depreciation recalculated at the end of year five using the double-declining balance method.
- Suppose an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.
This is because, unlike the straight-line method, the depreciation expense under the double-declining method is not charged evenly over the asset’s useful life. While some accounting software applications have fixed asset and depreciation management capability, you’ll likely have to manually record a depreciation journal entry into your software application. Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million. For accounting purposes, companies can use any of these methods, provided they align with the underlying usage of the assets. For tax purposes, only prescribed methods by the regional tax authority is allowed. As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years.
Using the 200% Double Declining Balance Depreciation Method
This results in depreciation being the highest in the first year of ownership and declining over time. The formula used to calculate annual depreciation expense under the double declining method is as follows. Double declining balance depreciation assumes that the rate of decline is twice that of the straight line method. While this may seem steep, DDB never completely reduces the asset’s worth to zero. When the net book price becomes insignificant in comparison to the item’s original cost, it is completely written off in the last year of its useful life.
Double declining balance method: A depreciation guide
The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a form of accelerated depreciation. This means that compared to the straight-line method, the depreciation expense will be faster in the early years of the asset’s life but slower in the later years. However, the total amount of depreciation expense during the life of the assets will be the same. The double declining balance method (DDB) describes an approach to accounting for the depreciation of fixed assets where the depreciation expense is greater in the initial years of the asset’s assumed useful life. The Double Declining Balance Method (DDB) is a form of accelerated depreciation in which the annual depreciation expense is greater during the earlier stages of the fixed asset’s useful life.
Depreciation expense for the year 2021 will therefore equal $1440 ($3600 x 0.4). Insights on business strategy and culture, right to your inbox.Part of the business.com network. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
When you drive a brand new vehicle off the lot at the dealership, its value decreases considerably in the first few years. Toward the end of its useful life, the vehicle loses a smaller percentage of its value every year. After the final year of an asset’s life, no depreciation is charged even if the asset remains unsold unless the estimated useful life is revised. We can incorporate this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12.
Units-of-production depreciation method
Visit QuickBooks Online now and get 50% off for three months plus a free guided setup. Assume that on January 1, 2019, Kenzie Company bought a printing press for $54,000. Kenzie pays shipping costs of $1,500 and setup costs of $2,500, assumes a useful life of five years or 960,000 pages. Based on experience, Kenzie Company anticipates a salvage value of $10,000. For the second year of depreciation, you’ll be plugging a book value of $18,000 into the formula, rather than one of $30,000.
Depreciation ceases when either the salvage value or the end of the asset’s useful life is reached. When analyzing depreciation, accountants are required to make a supportable estimate of an asset’s useful life and its salvage value. Some companies use accelerated depreciation methods to defer their tax obligations into future years. It was first enacted and authorized under the Internal Revenue Code in 1954, and it was a major change from existing policy. 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.
Step 1: Compute the Double Declining Rate
Since the double declining balance method has you writing off a different amount each year, you may find yourself crunching more numbers to get the right amount. You’ll also need to take into account how each year’s depreciation affects your cash flow. (You can multiply it by 100 to see it as a percentage.) This is also called the straight line depreciation rate—the percentage of an asset you depreciate each year if you use the straight line method. To calculate the depreciation expense for the first year, we need to apply the rate of depreciation (50%) to the cost of the asset ($2000) and multiply the answer with the time factor (3/12). On the whole, DDB is not a generally easy depreciation method to implement. 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 depreciation assumes that holdings depreciate twice as quickly as in the straight-line method, in which they devalue at an even rate. Accountants apply double declining balance depreciation to long-lived holdings that depreciate more rapidly than others. This technique is the most popular among the accelerated depreciation methods, in which assets devalue more rapidly in the beginning of their useful life.
In case of any confusion, you can refer to the step by step explanation of the process below. Hence, our calculation of the depreciation expense in Year 5 – the final year of our fixed asset’s useful life – differs from the prior periods. The steps to determine the annual depreciation expense under the double declining method are as follows.
The double declining balance depreciation method shifts a company’s tax liability to later years when the bulk of the depreciation has been written off. The company will have accrual basis of accounting definition less depreciation expense, resulting in a higher net income, and higher taxes paid. This method accelerates straight-line method by doubling the straight-line rate per year.
See Form 10-K that was filed with the SEC to determine which depreciation method McDonald’s Corporation used for its long-term assets in 2017. Notice that in year four, the remaining book value of $12,528 was not multiplied by 40%. Since the asset has been depreciated to its salvage value at the end of year four, no depreciation can be taken in year five.