Double Declining Balance Method for Depreciation With Examples

Under straight-line depreciation, the depreciation expense would be $4,600 annually—$25,000 minus $2,000 x 20%. Enter the purchase cost the property, not including the value of any land that came with it. Whether you are starting your first company or you are a dedicated entrepreneur diving into a new venture, Bizfluent is here to equip you with the tactics, tools and information to establish and run your ventures. Depreciation for an asset with a five-year expected life would span over six tax years, with a portion of a year’s deduction in year one and six. The book value at the end of year one drops to $30,000, and the depreciation expense decreases in subsequent years.

Calculating Double Declining Balance Depreciation

• This results in a steep decline in value in the first few years, tapering off over time.
• Understanding the pros and cons of the Double Declining Balance Method is vital for effective financial management and reporting.
• 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.
• Depreciation is the process by which you decrease the value of your assets over their useful life.
• We will cover everything from the basics to examples, making it easy for anyone to grasp.
• The most common declining balance percentages are 150% (150% declining balance) and 200% (double declining balance).

If, for example, an asset is purchased on 1 December and the financial statements are prepared on 31 December, the depreciation expense should only be charged for one month. In the accounting period in which an asset is acquired, the depreciation expense calculation needs to account for the fact that the asset has been available only for a part of the period (partial year). The following section explains the step-by-step process for calculating the depreciation expense in the first year, mid-years, and the asset’s final year. 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. By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year.

Step #7:

Depreciation expense, on the other hand, is recorded on the company’s income statement. By following these steps, you can accurately calculate the depreciation expense for each year of the asset’s useful life under the double declining balance method. This method helps businesses recognize higher expenses in the early years, which can be particularly useful for assets that rapidly lose value. Like the double declining balance method, the sum-of-the-years’ digits method is another accelerated depreciation method. It is calculated by multiplying a fraction by double declining balance method the asset’s depreciable base in each year.

Cons of the Double Declining Balance Method

• The prior statement tends to be true for most fixed assets due to normal “wear and tear” from any consistent, constant usage.
• Under the double-declining balance method, accumulated depreciation accumulates more rapidly in the early years of an asset’s life, reflecting accelerated depreciation.
• The beginning book value is multiplied by the doubled rate that was calculated above.
• However, one counterargument is that it often takes time for companies to utilize the full capacity of an asset until some time has passed.
• Depreciation for an asset with a five-year expected life would span over six tax years, with a portion of a year’s deduction in year one and six.
• Note that the Help and Tools panel will be hidden when the calculator is too wide to fit both on the screen.

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So, in the first year, the company would record a depreciation expense of $4,000. As a result, at the end of the first year, the book value of the machinery would be reduced to $6,000 ($10,000 – $4,000). If the double-declining depreciation rate is 40%, the straight-line rate of depreciation shall be its half, i.e., 20%. The carrying value of an asset decreases more quickly in its earlier years under the straight line depreciation compared to the double-declining method. Double-declining depreciation charges lesser depreciation in the later years of an asset’s life. Another thing to remember while calculating the depreciation expense for the first year is the time factor.

What is Double Declining Balance Depreciation?

That is less than the $5,000 salvage value determined at the beginning of the asset’s useful life. Note, there is no depreciation expense in years 4 or 5 under the double declining balance method. In this contra asset account case, the depreciation rate in the declining balance method can be determined by multiplying the straight-line rate by 2. For example, if the fixed asset’s useful life is 5 years, then the straight-line rate will be 20% per year. Likewise, the depreciation rate in declining balance depreciation will be 40% (20% x 2).