A Guide To The Double Declining Balance DDB Depreciation Method

The first one is obvious, as you need to make calculations and apply a mathematical method. As basic as it is, it requires a dedication that is not so important in the straight-line method. If we apply it to life as an example, we can say that it is the loss of value due to a product or asset’s use or the passage of time. A company estimates an asset’s useful life and salvage value (scrap value) at the end of its life.

The steps to determine the annual depreciation expense under the double declining method are as follows. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. In other words, it records how the value of an asset declines over time.

Example of Double Declining Balance Method

Your basic depreciation rate is the rate at which an asset depreciates using the straight line method. 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. For investors, https://www.bookstime.com/ they want deprecation to be low (to show higher profits). There are various alternative methods that can be used for calculating a company’s annual depreciation expense. 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.

• 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.
• To calculate the double-declining depreciation expense for Sara, we first need to figure out the depreciation rate.
• For example, if an asset costs $10,000, you can write off $1,000 annually over ten years.
• However, the management teams of public companies tend to be short-term oriented due to the requirement to report quarterly earnings (10-Q) and uphold their company’s share price.
• Accelerated depreciation methods, such as double declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages.
• Since you have to pay taxes on the income, the tax liability can be reduced if you initially write off the asset’s cost by impacting its depreciation.

Depreciation reduces the value of these assets on a company’s balance sheet. This formula is best for companies with assets that lose greater value in the early years and that want larger depreciation deductions sooner. With your second year of depreciation totaling $6,720, that leaves a book value of $10,080, which will be used when calculating your third year of depreciation.

Calculating Depreciation Using the Straight-Line Method

While most companies would look to avoid using the double declining balance method for depreciating their assets, some may still go with it. The reason for not using it is that the method results in a lower net income in the early years of the asset’s life. The most basic type of depreciation is the straight line depreciation method.

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. The double-declining method of depreciation accounting is one of the most useful and interesting concepts nowadays. It is also one of companies’ most popular methods of charging depreciation. The declining balance method is a type of accelerated depreciation used to write off depreciation costs earlier in an asset’s life and to minimize tax exposure. With this method, fixed assets depreciate more so early in life rather than evenly over their entire estimated useful life.

Disadvantages of Double Declining Balance Depreciation

This method accelerates straight-line method by doubling the straight-line rate per year. 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.

If you file estimated quarterly taxes, you’re required to predict your income each year. 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. 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. We must think that many assets will require higher maintenance costs over time—for example, a fleet of vehicles.

Double Declining Depreciation Rate Calculation

For example, last year, the actual depreciation expense, as per the depreciation rate, should have been $13,422 but kept at $12,108.86 to keep the asset at its estimated salvage value. So, the depreciation expense is calculated in the last year by deducting the salvage value from the opening book value. However, in a double-declining balance method of depreciation, it will be during the first few years of the asset’s life that more depreciation expense is incurred.

• To consistently calculate the DDB depreciation balance, you need to only follow a few steps.
• Assume that you’ve purchased a $100,000 asset that will be worth $10,000 at the end of its useful life.
• Companies have several options for depreciating the value of assets over time, in accordance with GAAP.
• This results in a depreciation expense on the income statement in each accounting period equivalent to a part of the asset’s total cost instead of generating expenditure all at one go.
• Since it always charges a percentage on the base value, there will always be leftovers.
• Generally speaking, DDB depreciation rates can be 150%, 200%, or 250% of straight-line depreciation.

The formula determines the expense for the accounting period multiplied by the number of units produced. 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 double declining balance method equation until they reach their salvage value. The best reason to use double declining balance depreciation is when you purchase assets that depreciate faster in the early years. A vehicle is a perfect example of an asset that loses value quickly in the first years of ownership.

Although several advantages are attributed to this way of reflecting depreciation, the most important one is that it can even eliminate maintenance costs. If we apply it in the tax field, depreciation could be understood as the write-off of the value of an asset over different tax years. See the screenshot below for the formulas used in the spreadsheet and the results of the MACRS half-year depreciation calculations. For instance, the original book value of an asset was $112,000, the year-end book value of the same asset will decrease due to depreciation.

That translates into higher depreciation expense at the beginning and much lower at the end. To start, a company must know an asset’s cost, useful life, and salvage value. Then, it can calculate depreciation using a method suited to its accounting needs, asset type, asset lifespan, or the number of units produced. Depreciation accounts for decreases in the value of a company’s assets over time. In the United States, accountants must adhere to generally accepted accounting principles (GAAP) in calculating and reporting depreciation on financial statements.