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• 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.
• GAAP states that when an asset is to be used for many years, the purchase needs to be deducted over time.
• Because of the high number of miles you expect to put on the truck, you estimate its useful life at five years.
• The DDB depreciation method is best applied to assets that quickly lose value in the first few years of ownership.

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. Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of the https://kelleysbookkeeping.com/llc-accounting-everything-you-need-to-know/ straight-line rate. When the depreciation rate for the declining balance method is set as a multiple, doubling the straight-line rate, the declining balance method is effectively the double-declining balance method. Over the depreciation process, the double depreciation rate remains constant and is applied to the reducing book value each depreciation period.

Example of Double Declining Balance Depreciation

However, many firms use a rate equal to 1.5 times the straight-line rate. The importance of the double-declining method of depreciation can be explained through the following scenarios. Sometimes, when the company is looking to defer the tax liabilities and reduce profitability in the initial years of the asset’s useful life, it is the best option for charging depreciation. We can understand how the depreciation expense is calculated yearly under the double-declining method from the schedule below. 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.

Over the equipment’s useful life, the business estimates that the equipment will produce 5,000 valuable items. Assuming there is no salvage value for the equipment, the business will report $4 ($20,000/5,000 items) of depreciation expense for each item produced. If 80 items were produced during the first month of the equipment’s use, the depreciation expense for the month will be $320 (80 items X $4). If in the next month only 10 items are produced by the equipment, only $40 (10 items X $4) of depreciation will be reported.

Double Declining Balance Method (DDB)

A vehicle is a perfect example of an asset that loses value quickly in the first years of ownership. Here, with proper double declining depreciation formula, you can accelerate the depreciation value of the assets. This method is more difficult to calculate than the more traditional straight-line method of depreciation. Also, most assets are utilized at a consistent rate over their useful lives, which does not reflect the rapid rate of depreciation resulting from this method. Further, this approach results in the skewing of profitability results into future periods, which makes it more difficult to ascertain the true operational profitability of asset-intensive businesses.

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. Recovery period, or the useful life of the asset, is the period over which you’re depreciating it, in years. 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.

DDB depreciation formula

While double declining balance has its money-up-front appeal, that means your tax bill goes up in the future. On the whole, DDB is not a generally easy depreciation method to implement. Both the double declining balance depreciation and straight line depreciation are commonly used to calculate depreciation. Under the declining balance method, yearly depreciation is calculated by applying a fixed percentage rate to an asset’s remaining book value at the beginning of each year. Also, in some cases, certain assets are more valuable or usable during the initial year of their lives.

While some accounting software applications have fixed asset and depreciation management capability, you’ll likely have to manually record a depreciation journal entry into your software application. Typically, accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double declining. 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. In the first year of service, you’ll write $12,000 off the value of your ice cream truck. It will appear as a depreciation expense on your yearly income statement. Now you’re going to write it off your taxes using the double depreciation balance method.

The benefits of double declining balance

The arbitrary rates used under the tax regulations often result in assigning depreciation to more or fewer years than the service life. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you have brought any assets on loan, then it can help you repay easily. Here, it will reduce the cost of an asset and the interest over a period. In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing.

• This approach is reasonable when the utility of an asset is being consumed at a more rapid rate during the early part of its useful life.
• Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
• Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own!
• And, unlike some other methods of depreciation, it’s not terribly difficult to implement.