Double Declining Balance Method of Deprecitiation Formula, Examples

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What is Double Declining Balance Depreciation?

Now that we have a beginning value and DDB rate, we can fill up the 2022 depreciation expense column. 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.

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• 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.
• In this article, we will break down the Double Declining Balance Depreciation method.
• In summary, the choice of depreciation method depends on the nature of the asset and the company’s accounting and financial objectives.
• 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.
• In contrast to straight-line depreciation, DDB depreciation is highest in the first year and then decreases over subsequent years.
• 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.

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. accounting (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.

Accelerated Depreciation

This method balances between the Double Declining Balance and Straight-Line methods and may be preferred for certain assets. 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. Double declining balance depreciation allows for higher depreciation expenses in early years and lower expenses as an asset nears the end of its life.

Companies will typically keep two sets of books (two sets of financial statements) – one for tax filings, and one for investors. Companies can (and do) use different depreciation methods for each set of books. Generally Accepted Accounting Principles (GAAP) allow for various depreciation methods, including DDB, as long as they provide a systematic and rational allocation of the cost of an asset over its useful life. Accounting For Architects Next, divide the annual depreciation expense (from Step 1) by the purchase cost of the asset to find the straight line depreciation rate. 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).