The double-declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly. Then, we need to calculate the depreciation rate, explained under the next heading. In the next step, we need to multiply the beginning book value by twice the depreciation rate and deduct the depreciation expense from the beginning value to arrive at the remaining value. We will repeat a similar process each year throughout the asset’s useful life or until we reach the asset’s salvage value. The when should a company recognize revenues on its books accelerates depreciation charges instead of allocating it evenly throughout the asset’s useful life.

Theoretically, this makes sense because the gains and losses from assets sold before and after the composite life will average themselves out. The composite method is applied to a collection of assets that are not similar and have different service lives. For example, computers and printers are not similar, but both are part of the office equipment.

• If you’re using the wrong credit or debit card, it could be costing you serious money.
• 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.
• Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business.

It is expected that the fixtures will have no salvage value at the end of their useful life of 10 years. Under the straight-line method, the 10-year life means the asset’s annual depreciation will be 10% of the asset’s cost. Under the double declining balance method the 10% straight line rate is doubled to 20%. However, the 20% is multiplied times the fixture’s book value at the beginning of the year instead of the fixture’s original cost.

Step 4: Compute Final Year Depreciation Expense

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. The cost of the truck including taxes, title, license, and delivery is $28,000.

• If asset depreciation is arbitrarily determined, the recorded “gains or losses on the disposition of depreciable property assets seen in financial statements”8 are not true best estimates.
• The adjustment to fair value is to be done by “class” of asset, such as real estate, for example.
• Since public companies are incentivized to increase shareholder value (and thus, their share price), it is often in their best interests to recognize depreciation more gradually using the straight-line method.
• When calculating depreciation expense for the next year, we will now use $30,781 accumulated depreciation amount instead of $73,875.

For example, a company purchases an asset with a total cost of $58,000, a five-year useful life, and a salvage value of $10,000. However, the asset is purchased at the beginning of the fourth month of the fiscal year. Depreciation is the act of writing off an asset’s value over its expected useful life, and reporting it on IRS Form 4562. The double declining balance method of depreciation is just one way of doing that.

What Is the Double Declining Balance Depreciation Method?

For instance, in the fourth year of our example, you’d depreciate $2,592 using the double declining method, or $3,240 using straight line. Now you’re going to write it off your taxes using the double depreciation balance method. The double-declining balance method accelerates the depreciation taken at the beginning of an asset’s useful life. Because of this, it more accurately reflects the true value of an asset that loses value quickly.

Double Declining Balance Method: Formula & Free Template

The double-declining balance method multiplies twice the straight-line method percentage by the beginning book value each period. Because the book value decreases each period, the depreciation expense decreases as well. In the final period, the depreciation expense is simply the difference between the salvage value and the book value. An asset for a business cost $1,750,000, will have a life of 10 years and the salvage value at the end of 10 years will be $10,000. You calculate 200% of the straight-line depreciation, or a factor of 2, and multiply that value by the book value at the beginning of the period to find the depreciation expense for that period. The best reason to use double declining balance depreciation is when you purchase assets that depreciate faster in the early years.

When to use the double declining balance depreciation method

Double declining balance is sometimes also called the accelerated depreciation method. 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 thus the decrease in the value of assets and the method used to reallocate, or “write down” the cost of a tangible asset (such as equipment) over its useful life span. Businesses depreciate long-term assets for both accounting and tax purposes.

Depreciation journal entries are considered an adjusting entry that should be recorded in your general ledger before running an adjusted trial balance. The beginning of period (BoP) book value of the PP&E for Year 1 is linked to our purchase cost cell, i.e. In addition, capital expenditures (Capex) consist of not only the new purchase of equipment but also the maintenance of the equipment. However, one counterargument is that it often takes time for companies to utilize the full capacity of an asset until some time has passed.

Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own! The best way to understand how it works is to use your own numbers and try building the schedule yourself. Under the generally accepted accounting principles (GAAP) for public companies, expenses are recorded in the same period as the revenue that is earned as a result of those expenses. Thus, when a company purchases an expensive asset that will be used for many years, it does not deduct the entire purchase price as a business expense in the year of purchase but instead deducts the price over several years. The useful life is estimated to be 4 years and a salvage value – $85,000.

Depreciation is technically a method of allocation, not valuation,[4] even though it determines the value placed on the asset in the balance sheet. Another type of fixed asset is natural resources, assets a company owns that are consumed when used. These assets are considered natural resources while they are still part of the land; as they are extracted from the land and converted into products, they are then accounted for as inventory (raw materials). Natural resources are recorded on the company’s books like a fixed asset, at cost, with total costs including all expenses to acquire and prepare the resource for its intended use.

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. 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. Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. 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. 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.

A vehicle is a perfect example of an asset that loses value quickly in the first years of ownership. Unlike straight line depreciation, which stays consistent throughout the useful life of the asset, double declining balance depreciation is high the first year, and decreases each subsequent year. However, note that eventually, we must switch from using the double declining method of depreciation in order for the salvage value assumption to be met. Since we’re multiplying by a fixed rate, there will continuously be some residual value left over, irrespective of how much time passes. If the company was using the straight-line depreciation method, the annual depreciation recorded would remain fixed at $4 million each period. Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the asset’s utility is consumed at a more rapid rate during the earlier phases of its useful life.