Mastering the Double Declining Balance Depreciation Method DDB: Formula and Calculator using the Double Declining Balance Method

By front-loading depreciation expenses, it offers the advantage of aligning with the actual wear and tear pattern of assets. This not only provides a more realistic representation of an asset’s condition but also yields tax benefits and helps companies manage risks effectively. Depreciation is a crucial concept in business accounting, representing the gradual loss of value in an asset over time. Among the various methods of calculating depreciation, the Double Declining Balance (DDB) method stands out for its unique approach.

• 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.
• The beginning book value is multiplied by the doubled rate that was calculated above.
• Therefore, under the double declining balance method the $100,000 of book value will be multiplied by 20% and will result in $20,000 of depreciation for Year 1.
• The theory is that certain assets experience most of their usage, and lose most of their value, shortly after being acquired rather than evenly over a longer period of time.

By reducing the value of that asset on the company’s books, a business is able to claim tax deductions each year for the presumed lost value of the asset over that year. If you’ve ever wondered why your shiny new car takes a huge value hit the first few years you own it, you’re not alone. This form of accelerated depreciation, known as Double Declining Balance (DDB) depreciation, is actually common method companies use to account for the expense of a long-lived asset. After the first year, we apply the depreciation rate to the carrying value (cost minus accumulated depreciation) of the asset at the start of the period.

Example of Double Declining Balance Method

Instead of multiplying by our fixed rate, we’ll link the end-of-period balance in Year 5 to our salvage value assumption. From this example it is obvious, that over the 5 years useful life of the asset in the beginning depreciation is much higher comparing to later years. And the book value at the end of the second year would be $3,600 ($6,000 – $2,400). This cycle continues until the book value reaches its introduction to elliott wave theory estimated salvage value or zero, at which point no further depreciation is recorded. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Download this accounting example in excel to help calculate your own Double Declining Depreciation problems.

To create a depreciation schedule, plot out the depreciation amount each year for the entire recovery period of an asset. You get more money back in tax write-offs early on, which can help offset the cost of buying an asset. 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. In later years, as maintenance becomes more regular, you’ll be writing off less of the value of the asset—while writing off more in the form of maintenance.

In certain cases businesses do use double declining balance method of depreciation to attribute cost of property, plant and equipment to expenses. The declining balance technique represents the opposite of the straight-line depreciation method, which is more suitable for assets whose book value drops at a steady rate throughout their useful lives. This method simply subtracts the salvage value from the cost of the asset, which is then divided by the useful life of the asset. So, if a company shells out $15,000 for a truck with a $5,000 salvage value and a useful life of five years, the annual straight-line depreciation expense equals $2,000 ($15,000 minus $5,000 divided by five). An asset’s estimated useful life is a key factor in determining its depreciation schedule.

The latter two are considered accelerated depreciation methods because they can be used by a company to claim greater depreciation expense in the early years of the asset’s useful life. At the end of an asset’s useful life, the total accumulated depreciation adds up to the same amount under all depreciation methods. Accumulated depreciation is the sum of all previous years’ depreciation expenses taken over the life of an asset.

What is An Accelerated Depreciation Method?

Companies use depreciation to spread the cost of an asset out over its useful life. Now that the rate is calculated, we can actually start depreciating the equipment. The declining method multiplies the book value of the asset by the double declining depreciation rate. The depreciation expense is then recorded in the accumulated depreciation account, which reduces the asset book value.

How to plan double declining balance depreciation

Here’s the depreciation schedule for calculating the double-declining depreciation expense and the asset’s net book value for each accounting period. In case of any confusion, you can refer to the step by step explanation of the process below. Double declining balance (DDB) depreciation is an accelerated depreciation method. DDB depreciates the asset value at twice the rate of straight line depreciation. Companies will typically keep two sets of books (two sets of financial statements) – one for tax filings, and one for investors.

Building Better Businesses

The account balances remain in the general ledger until the equipment is sold, scrapped, etc. Because the equipment has a useful life of only five years it is expected to quickly lose value in the first few years of use – making DDB depreciation the most appropriate method of depreciation for this type of asset. The DDB depreciation method is best applied to assets that quickly lose value in the first few years of ownership. This is most frequently the case for things like cars and other vehicles but may also apply to business assets like computers, mobile devices and other electronics.

Double Declining Balance Method Formula (DDB)

This method takes most of the depreciation charges upfront, in the early years, lowering profits on the income statement sooner rather than later. 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. Continuing with the same numbers as the example above, in year 1 the company would have depreciation of $480,000 under the accelerated approach, but only $240,000 under the normal declining balance approach. 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.

If a company often recognizes large gains on sales of its assets, this may signal that it’s using accelerated depreciation methods, such as the double-declining balance depreciation method. Net income will be lower for many years, but because book value ends up being lower than market value, this ultimately leads to a bigger gain when the asset is sold. If this asset is still valuable, its sale could portray a misleading picture of the company’s underlying health.