How to calculate double declining depreciation

What Is the Double Declining Balance (DDB) 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. The double declining balance depreciation method is an accelerated depreciation method that counts as an expense more rapidly (when compared to straight-line depreciation that uses the same amount of depreciation each year over an asset’s useful life). Similarly, compared to the standard declining balance method, the double declining method depreciates assets twice as quickly.

Key Takeaways

  • The double declining balance (DDB) method is an accelerated depreciation calculation used in business accounting.
  • Specifically, the DDB method depreciates assets twice as fast as the traditional declining balance method.
  • The DDB method records larger depreciation expenses during the earlier years of an asset’s useful life, and smaller ones in later years.
  • As a result, companies opt for the DDB method for assets that are likely to lose most of their value early on, or which will become obsolete more quickly.

Double Declining Balance Depreciation Method

Double Declining Balance (DDB) Depreciation Formula

Understanding DDB Depreciation

The declining balance method is one of the two accelerated depreciation methods, and it uses a depreciation rate that is some multiple of the straight-line method rate. The double declining balance (DDB) method is a type of declining balance method that instead uses double the normal depreciation rate.

Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of the 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. The book value, or depreciation base, of an asset, declines over time.

With the constant double depreciation rate and a successively lower depreciation base, charges calculated with this method continually drop. The balance of the book value is eventually reduced to the asset’s salvage value after the last depreciation period. However, the final depreciation charge may have to be limited to a lesser amount to keep the salvage value as estimated.

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.

Because the double declining balance method results in larger depreciation expenses near the beginning of an asset’s life—and smaller depreciation expenses later on—it makes sense to use this method with assets that lose value quickly.

Example of DDB Depreciation

As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. After 10 years, it would be worth $3,000, its salvage value. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years–that is, $30,000 minus $3,000, divided by 10.

Using the double-declining balance method, however, one would first calculate the straight-line depreciation (SLDP) as 1/10 years of useful life = 10% per year. They would then double the SLDP (10%x2=20%) and thus deduct 20% of $30,000 ($6,000) in year one, 20% of $24,000 ($4,800) in year two, and so on, stopping when the book value equaled the salvage value.

DDB Depreciation FAQs

What Is Depreciation?

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. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time.

Why Is Double Declining Depreciation an Accelerated Method?

Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset. 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. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset.

How Does DDB Differ From Declining Depreciation?

Both DDB and ordinary declining depreciation are accelerated methods. The difference is that DDB will use a depreciation rate that is twice that (double) of the one used in standard declining depreciation.

What Assets Are DDB Best Used for?

DDB is ideal for assets that very rapidly lose their values or quickly become obsolete. This may be true with certain computer equipment, mobile devices, and other high-tech items, which are generally useful earlier on but become less so as newer models are brought to market.

How to calculate double declining depreciation

Accelerated depreciation techniques charge a higher amount of depreciation in the earlier years of an asset’s life.В One way of accelerating the depreciation expense is the double decline depreciation method.В

In this lesson, I explain what this method is, how you can calculate the rate of double-declining depreciation, and the easiest way to calculate the depreciation expense.В

Double Declining Depreciation

Double declining balance depreciation is an accelerated depreciation method that charges twice the rate of straight-line deprecation on the asse t’s  carrying value at the start of each accounting period.

For example, if an asset has a useful life of 10 years (i.e., Straight-line rate of 10%), the depreciation rate of 20% would be charged on its carrying value.

Unlike the straight-line method, the double-declining method depreciates a higher portion of the asset’s cost in the early years and reduces the amount of expense charged in later years.

Therefore, it is more suited to depreciating assets with a higher degree of wear and tear, usage, or loss of value earlier in their lives.

Formula

The formula for calculating the rate of depreciation is:

Annual Depreciation %В = В (2 В Г—В 100 В Г· В Useful Life in Years) %

Although the depreciation rate under the double-declining depreciation is two times the depreciation rate under the straight-line method, the amount of depreciation expense charged under the straight-line basis is not its exact half.В

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.

The following section explains the step-by-step process for calculating the depreciation expense in the first year, mid-years, and the asset’s final year.

How to calculate Depreciation

First-Year Depreciation

First-year depreciation = CostВ Г— В Depreciation%В Г—В Time Factor

First-year depreciation expense is calculated by multiplying the asset’s full cost by the annual rate of depreciation and time factor.

It is important to note that we apply the depreciation rate on the full cost rather than the depreciable cost (cost minus salvage value).

Another thing to remember while calculating the depreciation expense for the first year is the time factor.

In the accounting period in which an asset is acquired, the depreciation expense calculation needs to account for the fact that the asset has been available only for a part of the period (partial year).

If, for example, an asset is purchased on 1 December and the financial statements are prepared on 31 December, the depreciation expense should only be charged for one month.

We can incorporate this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12. In the case above, the time factor will be 1/12.

Middle Years Depreciation

Middle Years Depreciation = Carrying ValueВ Г— В Depreciation%В Г—В 1

After the first year, we apply the depreciation rate to the carrying valueВ (cost minus accumulated depreciation) of the asset at the start of the period.

Since the assets will be used throughout the year, there is no need to reduce the depreciation expense, which is why we use a time factor of 1 in the depreciation schedule (see example below).

An exception to this rule is when an asset is disposed before its final year of its useful life, i.e. in one of its middle years. In that case, we will charge depreciation only for the time the asset was still in use (partial year).В Like in the first year calculation, we will use a time factor for the number of months the asset was in use but multiply it by its carrying value at the start of the period instead of its cost.

Depreciation in the year of disposal if the asset is sold before its final year of useful life is therefore equal toВ Carrying ValueВ Г— В Depreciation%В Г—В Time Factor. No depreciation is charged following the year in which the asset is sold.

Final Year Depreciation

Final Year Depreciation = Carrying Value – Salvage ValueВ

In the last year of an asset’s useful life, we make the asset’s net book value equal to its salvage or residual value. This is to ensure that we do not depreciate an asset below the amount we can recover by selling it.

For example, if an asset has a salvage value of $8000 and is valued in the books at $10,000 at the start of its last accounting year. In the final year, the asset will be further depreciated by $2000, ignoring the rate of depreciation.

After the final year of an asset’s life, no depreciation is charged even if the asset remains unsold unless the estimated useful life is revised.

Example

How to calculate double declining depreciation

On 1 October 2020, Sara purchased a laptop costing $2000 for her fashion illustration business.

Sara intends to use the laptop for four years, after which the laptop will have an estimated resale value of $200.

Sara wants to know the amounts of depreciation expense and asset value she needs to show in her financial statements prepared on 31 December each year if the double-declining method is used.В

You can assume the laptop is not sold at the end of its useful life. В В

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.

How to calculate double declining depreciation

To calculate the double-declining depreciation expense for Sara, we first need to figure out the depreciation rate.

Depreciation % = (2 Г— 100 Г· 4)% = 50%

In the first year, we will only charge the depreciation expense for the three months that the laptop was available for use (from 1 October 2020 to 31 December 2020).В В

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).

To calculate the depreciation expense of subsequent periods, we need to apply the depreciation rate to the laptop’s carrying value  at the start of each accounting period  of its life.

For example, the depreciation expense for the second accounting year will be calculated by multiplying the depreciation rate (50%) by the carrying value of $1750 at the start of the year, times the time factor of 1.В

The time factor for any accounting period that falls between the first and the last period is 1 because the asset will be available for the entire period and, therefore, should be charged the depreciation expense in full.

The amount of final year depreciation will equal the difference between the book value of the laptop at the start of the accounting period ($218.75) and the asset’s salvage value ($200).

How to calculate double declining depreciation

How to calculate double declining depreciation

Double Declining Balance Method is one of the accelerated methods used for the calculation of the depreciation amount to be charged in the income statement of the company and it is calculated by multiplying the Book value of asset with Rate of depreciation as per straight-line method and 2

Double Declining Balance Depreciation Method

A double-declining balance method is a form of an accelerated depreciation method in which the asset value is depreciated at twice the rate it is done in the straight-line method. Since the depreciation is done at a faster rate (twice to be precise) of the straight-line method, it is called accelerated depreciation.

However, accelerated depreciation does not mean that the depreciation expense will also be higher. The asset will depreciate by the same amount; however, it will be expensed higher in the early years of its useful life while the depreciation expense will be lower in the later years as compared to the straight-line method of depreciation.

How to calculate double declining depreciation

Double Declining Balance Method Formula

Using the Double-declining balance method, the depreciation will be:

  • Double Declining Balance Method Formula = 2 X Cost of the asset X Depreciation rate or
  • Double Declining Balance Formula = 2 X Cost of the asset/Useful Life

How to Calculate Double Declining Balance Depreciation

The following are the steps involved in the calculation of depreciation expense using a Double declining method.

  1. Determine the initial cost of the asset at the time of purchasing.
  2. Determine the salvage value of the asset, i.e., the value at which the asset can be sold or disposed of after its useful life is over.
  3. Determine the useful or functional life of the asset
  4. Calculate depreciation rate, i.e., 1/useful life
  5. Multiply the beginning period book value by twice the depreciation rate to find the depreciation expense
  6. Deduct the depreciation expense from the beginning value to calculate the ending period value
  7. Repeat the above steps till the salvage value is reached

Double Declining Method Example

Suppose a business has bought a machine for $ 100,000. They have estimated the useful life of the machine to be 8 years with a salvage value of $ 11,000.

Now, as per the straight-line method of depreciation:

  • Cost of the asset = $ 100,000
  • Salvage Value = $ 11,000
  • The useful life of the asset = 8 years
  • Depreciation rate = 1/useful life *100 = (1/8) * 100 = 12.5%

Double-declining balance formula = 2 X Cost of the asset X Depreciation rate.

Here, it will be 2 x 12.5% = 25%

  • Year 1 Depreciation = $100000 X 25% = $25,000
  • Year 2 Depreciation = $75,000 x 25% = $18,750

Depreciation account of the balance sheet will look like below over the 8 years of the machine’s life:

How to calculate double declining depreciation

In the above table, it can be seen:

  • In the double declining balance formula, depreciation rate remains the same and is applied to the ending value of the last year
  • The double declining balance depreciation value keeps decreasing over the life of the asset
  • The final double declining balance depreciation expense was $ 2348, which is less than the actual $3,338 (25% of $13,348 ). It was done to keep the salvage value as estimated

How to adjust the depreciation charges on the Balance sheet, Income statement, and the cash flow statement?

Now, we will look into how this expense is charged on the Balance sheet, income statement, and cash flow statement in detail. Let us take the double declining balance example of the machine:

  1. When the machine is bought for $ 100,000, the cash and cash equivalents are reduced by $ 100,000 and moved to the Property, plant, and equipment line of the balance sheet.
  2. At the same time, an outflow of $ 100,000 is shown in the cash flow statement.
  3. Now, $ 25,000 will be charged to the income statement as a depreciation expense in the first year, $ 18,750 in the second year, and so on for 8 continuous years. Although all the amount is paid for the machine at the time of purchase, however, the expense is charged over a period of time.
  4. Every year respective depreciation expense is added to a contra account of the balance sheet, i.e., Property, plant, and equipment. This is called accumulated depreciation. This is to reduce any carrying value of the asset. Thus, after the 1 st year, the accumulated depreciation will be $ 25000. After 2 nd year it will be $ 43,000, and so on, till the end of the 8 th year, it will be $ 89,000.
  5. After the useful life of the machine is over, the carrying value of the asset will be only $ 11,000. The management will sell the asset, and if it is sold above the salvage value, a profit will be booked in the income statement or else a loss if sold below the salvage value. The amount earned after selling the asset will be shown as the cash inflow in the cash flow statement, and the same will be entered in the cash and cash equivalents line of the balance sheet.

When is the Double Declining Method used?

Double declining balance method is used in two circumstances:

  • When the asset is utilized at a more rapid rate in the initial years of its useful life
  • When the business intends to recognize the expense in the early stage to reduce profitability and thereby defer taxes

Disadvantages of Double Declining Method of Depreciation

The double-declining balance method has some disadvantages over the straight-line method:

  • It is a bit complex than the more traditional and simpler straight-line method.
  • Most of the assets are used consistently over their useful life, thus depreciating them at an accelerated rate does not make sense. Further, it does not reflect the actual use of the asset.
  • A double-declining balance method skews profitability. The Company less profitable in the early years than in later years; thus, it will be difficult to measure the true operational profitability of the Company.

Conclusion

A double-declining balance depreciation method is an accelerated depreciation method that can be used to depreciate the value of the asset over the useful life of the asset. It is a bit complex method than the straight-line method of depreciation but is useful for deferring tax payments and maintain low profitability in the early years.

Recommended Articles

This has been a guide to the Double Declining Balance Method of Depreciation. Here we discuss its double declining balance formula along with practical examples, advantages, and disadvantages. You may learn more about accounting from the following article –

What is depreciation?

Depreciation is a revenue expenditure occurring due to usage, wear, and tear or obsolescence of the asset. It is reported in the financial statements of every entity holding fixed assets.

Depreciation is included in operating expenses in the income statement, deducted from the non-current assets in order to report the net book value on the balance sheet, and added back in the cash flow statement in the operating activities section.

Non-current assets are assets that have a useful life of more than one year. It also includes property, plant and equipment.

Any purchase of property, plant or equipment is a huge investment and it would be unfair to deduct the entire amount in one accounting period.

Hence, according to IAS 16 the cost should be allocated throughout the useful life of the asset on a systematic basis.

This allocation of cost is called depreciation. One of the commonly known and used methods of depreciation is the double declining method.

Double declining method of depreciation:

This method of depreciation is an accelerated method of depreciation meaning it reduces the value of asset at a faster rate than the straight-line method of depreciation.

It is also known as reducing balance method. It depreciates in such a way that higher depreciation expenses are charged in the early years of the useful life of asset.

Double declining method or reducing balance method of depreciation is most appropriate for assets like plant and machinery.

In this era of technological advancement, assets like plant and machinery or equipment lose its value rapidly due to introduction of better devices every now and then.

The formula to calculate annual depreciation with double declining method is:

(Net Book Value – Scrap Value) * Depreciation Rate

Where, Net book Value of an asset is its carrying amount less accumulated depreciation; Scrap Value is the amount that you expect to receive at the disposal of asset at the end of its useful life.

Example:

ARTT Ltd. is a manufacturing company that acquired a plant costing $750,000 on 1 st January 2019. It expects to dispose of the plant as scrap for $5,000 at the end of its useful life.

As shown in the table, the annual depreciation expense kept on decreasing and the highest depreciation charge was in the year the plant was acquired.

If we compare this to the straight-line method, the annual depreciation would be $150,000 (750,000 x 20%) in all the years i.e. 2019, 2020 and 2021.

Entities usually opt for this method to decrease the income tax amount they will have to pay since depreciation is a deduction allowed.

Also, this method correctly assumes that the plant would rapidly lose its value in the market since it is a technological equipment.

Other than that, the plant also works best at the start of its useful life since it has the maximum capacity.

With time, due to wear and tear and usage, the plant’s capacity reduces leading to lower output production.

Accounting CPE Courses & Books

What is Double Declining Balance Depreciation?

The double declining balance method is an accelerated form of depreciation under which most of the depreciation associated with a fixed asset is recognized during the first few years of its useful life. This approach is reasonable under either of the following two circumstances:

When the utility of an asset is being consumed at a more rapid rate during the early part of its useful life; or

When the intent is to recognize more expense now, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes).

However, 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.

To calculate depreciation under the double declining method, multiply the asset book value at the beginning of the fiscal year by a multiple of the straight-line rate of depreciation. The double declining balance formula is:

Double-declining balance (ceases when the book value = the estimated salvage value)

2 × Straight-line depreciation rate × Book value at the beginning of the year

A variation on this method is the 150% declining balance method, which substitutes 1.5 for the 2.0 figure used in the calculation. The 150% method does not result in as rapid a rate of depreciation at the double declining method.

Example of Double Declining Balance Depreciation

ABC Company purchases a machine for $100,000. It has an estimated salvage value of $10,000 and a useful life of five years. The double declining balance depreciation calculation is:

Making an expensive purchase for your company of equipment or property can often mean a tax deduction for your business. Tax rules require you to spread the total cost of asset purchases you want to deduct as a business expense over its estimated useful life. To do so, you can use one of several ways to calculate depreciation. In this article, we will discuss what depreciation is and how to calculate it using four primary methods.

What is depreciation?

Depreciation is an accounting technique used to allocate the cost of an asset over time, usually its useful life, which is defined as an estimate of how long in years the asset is likely to remain in service — or useful — and generate revenue. When your company purchases an asset, you can deduct that cost as a business expense, but federal tax regulations require you to spread the total cost over its estimated useful life.

Depreciation shows the expense of using an asset over time and is unrelated to its physical condition. An example would be if you purchased a piece of machinery for your company at a total cost of $1,000. The average useful life of that piece of machinery is 10 years, so it would decrease in value by 10% each year.

Why would I use depreciation?

Depreciating assets means you may have more control over your finances because you can determine how much you’ll deduct in taxes for those assets each year. Depreciation can help you spread out a large expense for your company over multiple years instead of it showing up in your accounting books as one major expense in a single year.

How to calculate depreciation

There are four primary ways of calculating depreciation:

  • Straight-line depreciation: This is the most common method and is used to split the value of an asset evenly during its useful life.
  • Double-declining balance depreciation: This method is used to depreciate more of an asset’s value immediately after you buy it and less value later in its life.
  • Sum-of-the-year’s digits depreciation: This method is used to depreciate more of an asset’s cost in the earliest years of its useful life.
  • Units of production depreciation: This method is used to depreciate a piece of equipment based on how much work it does or will do.

Here is how to calculate depreciation of an asset using each of the four methods with an example for each one:

Straight-line depreciation

Smaller businesses often will use the straight-line depreciation method if they don’t have an accountant or tax advisor. To calculate using the straight-line depreciation method:

  1. Subtract the salvage value from the asset cost.
  2. Divide that number by its useful life.

The formula looks like this:

(Asset cost – salvage value) / useful life = Depreciation value per year

Here’s an example:

Your office buys an office cubicle system for $15,000. The salvage value of the system is $500, and it has a useful life of 10 years. To find out how much you can deduct in taxes each year, you use the formula:

(15,000 – 500) / 10 = $1,450

You can deduct $1,450 per year for the 10 years of the system’s useful life.

Double-declining balance depreciation

If you want to recover more of an asset’s early value, you may choose to use the double-declining balance method of depreciation. To calculate using this method:

  1. Double the amount you would take under the straight-line method.
  2. Multiply that number by the book value of the asset at the beginning of the year.
  3. Subtract that number from the original value of the asset for depreciation value in year one.
  4. Repeat the first two steps.
  5. Subtract the new number from year one’s value to find year two’s value.
  6. Continue repeating steps for subsequent years.

The formula looks like this:

(2 x straight-line depreciation rate) x book value = Declining balance per year

Here’s an example:

The $15,000 office cubicle system depreciates over 10 years, so its straight-line depreciation rate is 10%. For the first year of the system’s life:

(2 x .10) x 15,000 = $3,000

You can deduct $3,000 of the system’s value in its first year. For year two, the value is now $12,000 so for year two:

(2 x .10) x 12,000 = $2,400

You then can deduct $2,400 from the first-year value of $12,000 to find the second year value of $9,600. You would continue the process for years three through 10.

Sum-of-the-year’s digits depreciation

If you decide you want to recover more of an asset’s upfront value but with a more even distribution over time, you can use the sum-of-the-year’s digits method or SYD. To calculate:

  1. Add up the digits in the asset’s useful life. If the life is 15 years, you add 1 + 2 + 3 + 4 + 5 = 15 is the SYD
  2. Divide the asset’s remaining lifespan by the SYD.
  3. Subtract the salvage value from the asset cost
  4. Multiply the two numbers.

The formula looks like this:

(Remaining lifespan / SYD) x (asset cost – salvage value) = SYD depreciation the first year

Here’s an example:

Your office cubicle system costs $15,000, has a salvage value of $500, and will depreciate over a 10-year useful life. Adding the digits for the system’s useful life would be: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55

(10 / 55) x (15,000 – 500) = $2,610 for the first year deduction

Each year, the system’s lifespan reduces by one, so the second year equation would be:

(9 / 55) x (15,000 – 500) = $2,372 for the second year deduction

Units of production depreciation

Businesses that want to deduct a piece of equipment that creates a product can use the units of production method of depreciation. You can also use this method if you can measure usage of the asset in hours. To calculate using this method:

  1. Subtract the salvage value from the asset cost.
  2. Divide that number by the estimated number of hours in the asset’s useful life to get cost per hour.
  3. Multiply the number of hours (or units of production) in the asset’s useful life by the cost per hour for total depreciation.

The formula looks like this:

(Asset cost – salvage value) / hours of useful life = Units of production depreciation cost per hour

Cost per hour x hours of useful life = Total depreciation

Here’s an example:

Jonathan’s House of Tabletops purchases a material cutting machine for $75,000. It has a salvage value of $6,000 and has a useful life of 90,000 hours. To find the units of production cost per hour:

(75,000 – 6,000) / 90,000 = $.76 cost per hour

To find the total depreciation of the machine:

.76 x 90,000 = $69,000

The machine will depreciate by $69,000 during its useful life.

Enter the asset cost, residual value, and the useful life of the asset in years to determine the double-declining depreciation.

Double Declining Depreciation Formula

The following formula is used to calculate a double-declining depreciation.

  • Where D is the double-declining depreciation
  • AC is the asset cost
  • RV is the residual value
  • L is the useful life of the asset

Double Declining Depreciation Definition

A double-declining depreciation is defined as a method of accounting for the expense of a long-lived asset that depreciates the asset twice as fast as a standard method.

When is a double-declining depreciation used?

A double-declining depreciation is most often used for assets that lose value quickly. Since the double-declining method depreciates an asset twice as fast as the straight-line method, it’s useful to use this method when analyzing or considering assets that lose value quickly suck as machines that deteriorate quickly over time.

Does double-declining depreciation use salvage value?

The double-declining depreciation method does still use salvage value in its equation. This can be seen in the formula presented above. Even though the asset being analyzed most likely depreciates quickly, that does not mean the asset has no salvage value at the end of its useful life.

Why do companies use the double-declining depreciation method?

A company will use a double-declining method when the asset they have loses value faster than a typical asset they own. They also may use the double-declining method when they want to realize the depreciation of the asset sooner than later. Since depreciation can be written off on taxes, if a company has a financial reason to save on some taxes now instead of later, they could use this method.

How to calculate a double-declining depreciation?

  1. First, determine the total cost of the asset. This is should be the initial cost and the maintenance costs over its lifetime.
  2. Next, determine the residual value. Determine the value of the asset after its useful life.
  3. Next, determine the total useful lifetime in years.
  4. Finally, calculate the yearly double-declining depreciation.

A double-declining deprecation is an accelerated model used in accounting to measure the depreciation of an asset. It doubles the typical straight-line deprecation.

This is used in business so that companies can account for worst-case scenario deprecation and allocate resources accordingly.

An important part of having assets is knowing their value and how to get the most out of their worth. It is important to know how quickly your assets are depreciating, assess how you use them and figure out what profit or benefit your assets can bring to you. To do this, you can use the double-declining balance method for depreciation and value calculations. In this article, we discuss what double-declining balance is, how to calculate it and when to use this method with an example.

What is a double-declining balance?

Double-declining balance is an accelerated method of depreciation, where most depreciation associated with an asset is recognized during the first few years of its useful life.

Accelerated depreciation does not mean that the depreciation expense is also higher. With a double-declining balance, the asset depreciates by the same amount. However, compared to the straight-line method of depreciation, it is expensed higher in the early years of its useful life, while the depreciation expense is lower in later years.

How to calculate double-declining balance

Here are the steps needed to determine the double-declining balance:

  1. Determine the initial cost of the asset at the time of purchase.
  2. Determine the salvage value of the asset.
  3. Determine the useful or functional life of the asset.
  4. Calculate the depreciation rate.
  5. Calculate the depreciation expense.
  6. Calculate the ending period value.
  7. Repeat the previous steps until the salvage value is reached.

1. Determine the initial cost of the asset at the time of purchasing

If you bought something of large monetary value, there is a good chance that the value has depreciated since you first purchased it. Search your records to recall what the original price of this asset was. It may be a car, house or even land that depreciates over time and is likely not worth the price which you originally paid.

2. Determine the salvage value of the asset

The salvage value is the value at which an asset can be sold after it is done being useful. This would be the best price you could get for this asset if you were to sell it as is today.

3. Determine the useful or functional life of the asset

It is important to know the current condition of the asset in question so you can figure out how you personally value the asset. Consider the age and condition, as well as the function of the asset and its ability to complete the function. Knowing how you feel about it will ultimately help you decide whether you want to keep or sell the asset. Just as important, this will help you calculate the depreciation of your asset.

4. Calculate the depreciation rate

To determine the depreciation rate, recall the usefulness of the asset as done in step 3. Then, take this number and use it for the following equation:

Depreciation rate = 1 / useful life

This is also referred to as the “straight-line depreciation percent.”

5. Calculate the depreciation expense

After you know your asset’s depreciation rate, refer back to how much you originally paid for this asset; this is also referred to as the “beginning period book value.” Then, multiply this number by the depreciation rate to calculate the depreciation expense. Follow this formula to find it:

Depreciation expense = Beginning period book value * 2 (Depreciation rate)

6. Calculate the ending period value

Once you have calculated the depreciation expense, subtract this number from the beginning value to calculate the ending period value. The formula to calculate this is as follows:

Ending period value = Beginning period book value – depreciation expense

7. Repeat the previous steps until the salvage value is reached

The point of determining depreciation and rates is to figure out what the value of your asset is worth today. This helps you calculate the amount of depreciation you’re facing with this asset, in the allotted time for which you calculate owning the asset. The previous steps are set up to ultimately calculate the following equation:

Depreciation = 2 * Straight-line depreciation percent * Beginning period book value

These steps are to be repeated and this equation used for each year that you plan to calculate the depreciation for. For example, you may want to calculate the depreciation for more than a set amount of years, so that you can determine how quickly your asset will depreciate, how you would like to use the asset until then and also when you plan to sell the asset for a profit.

When to use double-declining balance

Knowing how to use double-declining balance is just as important as knowing when to use it. There are two circumstances in which double-declining balance should be used:

  • When the usefulness of an asset is being consumed at a more rapid rate during the early part of its useful life
  • When the intent is to recognize more expense now, shifting profit recognition further into the future

The second circumstance may be of use when it comes to deferring income taxes. You should use this method to find depreciation and determine the value of your assets as it relates to depreciation.

Double-declining balance example

When using the double-declining balance method, be sure to use the following formula to make your calculations:

Depreciation = 2 * Straight-line depreciation percent * Beginning period book value

As an example of how to use this, suppose you purchase a $40,000 car (the asset) for your own personal use. Let’s say you expect this particular car to last you for 12 years (useful life).

Using the previous steps, you should first determine the depreciation rate of the car using the following formula:

Depreciation rate = 1 / useful life

Depreciation rate = 1/12

For the sake of this example, remember that in this instance the beginning period book value is the price you purchased for the car. With this, you will then find the depreciation expense:

Depreciation expense = Beginning period book value * 2 (Depreciation rate)

Depreciation expense = $40,000 * 2 (1/12)

Depreciation expense = $40,000 * 1/6

Depreciation expense = $6,666.67

Then, find the ending period value:

Ending period value = Beginning period book value – depreciation expense

Ending period value = $40,000 – $6,666.67

Ending period value = $33,333.33

Lastly, solve the ending period value:

Ending period value = Beginning period book value – depreciation expense

Ending period value = $40,000 – $33,333.33

Ending period value = $36,666.67

With this method, you can determine that depreciation expense will be $6,666.67 after 12 years, and what the car will likely be worth after 12 years.