Double Declining Balance Method: A Beginners Guide To Calculating Depreciation

The prior statement tends to be true for most fixed assets due to normal “wear and tear” from any consistent, constant usage. The cost of the truck including taxes, title, license, and delivery is $28,000. Because of the high number of miles you expect to put on the truck, you estimate its useful life at five years. Even though year five’s total depreciation should have been $5,184, only $4,960 could be depreciated before reaching the salvage value of the asset, which is $8,000. Remember, in straight line depreciation, salvage value is subtracted from the original cost. If there was no salvage value, the beginning book balance value would be $100,000, with $20,000 depreciated yearly.

Depending on the type of asset — tangible versus intangible — there are differences in the calculation method allowed and how they are presented on financial statements. Understanding these differences is critical when serving business clients. Using the straight-line depreciation method requires the estimation of useful life and salvage or residual value of the asset.

What Is the DDB Method?

Accrual accounting requires a business to coordinate with the costs it attracts with the incomes it creates through each accounting term. Tangible assets, like machinery or equipment, contribute toward incomes over many accounting periods. Then an organization distributes the resource’s expense over its valuable life through depreciation. 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.

The company then needs to measure the value of the asset at the end of its useful life. This method of measuring the decreased value of the asset in the useful years is called depreciation. Deskera Books is an online accounting software that your business can use to automate the process of journal entry creation and save time.

What is the Double Declining Balance Method?

The double declining balance (DDB) depreciation method is an approach to accounting that involves depreciating certain assets at twice the rate outlined under straight-line depreciation. This results in depreciation being the highest in the first year of ownership and declining over time. In the double-declining method, depreciation expenses are larger in the early years of an asset’s life and smaller in the latter portion of the asset’s life. Companies prefer to use the double-declining method for assets expected to become obsolete more quickly.

Now that you have all of the information, you can follow the formula for double declining balance depreciation. The double declining method is an alternative calculation to the straight-line https://www.bookstime.com/ method, which tracks the same amount of loss each year. With the straight-line method, you can set a dollar amount for item depreciation and subtract that value from the asset annually.

What is the Double Declining Balance Depreciation Method?

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 double declining balance method 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. This section gives an insight into why some companies would not want to have a double declining balance method as an option to depreciate their assets.

So, at the end of the loan period, the final, huge balloon payment is made. Obviously, as time progresses and assets are used, their value decreases—which is the principle behind depreciation. This can make profits seem abnormally low, but this isn’t necessarily an issue if the business continues to buy and depreciate new assets on a continual basis over the long term. This article will serve as a guide to understanding the DDB depreciation method by explaining how it works, why it can be beneficial, and its potential downsides. 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. In addition, capital expenditures (Capex) consist of not only the new purchase of equipment but also the maintenance of the equipment.

An amortization schedule is a table or chart that outlines both loan and payment information for reducing a term loan (i.e., mortgage loan, personal loan, car loan, etc.). In year 5, companies often switch to straight-line depreciation and debit Depreciation Expense and credit Accumulated Depreciation for $6,827 ($40,960/6 years) in each of the six remaining years. Therefore, the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4. Deskera can also help with your inventory management,  customer relationship management, HR, attendance and payroll management software. Deskera can help you generate payroll and payslips in minutes with Deskera People.