Double-declining balance (DDB) is a declining balance method that instead uses double the normal depreciation rate. Double declining balance depreciation is an accelerated depreciation method that charges twice the rate of straight-line deprecation on the asset’s carrying value at the start of each accounting period. Some companies use accelerated depreciation methods to defer their tax obligations into future years. It was first enacted and authorized under the Internal Revenue Code in 1954, and it was a major change from existing policy.

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. Hence, our calculation of the depreciation expense in Year 5 – the final year of our fixed asset’s useful life – differs from the prior periods. The steps to determine the annual depreciation expense under the double declining method are as follows. The importance of the double-declining method of depreciation can be explained through the following scenarios.

Definition of Double Declining Balance Method of Depreciation

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 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. Here’s the depreciation schedule for double declining balance method 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. 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 until they reach their salvage value.

• In the declining balance method, depreciation rates can be 150%, 200% (double), or 250% of the straight-line rate.
• After 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 remaining six years.
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• So, if an asset cost $1,000, you might write off $100 every year for 10 years.
• This method of depreciation is especially useful for assets that deteriorate more rapidly in their first few years of use, as the method will reduce deductions as the years go on.
• In the case of a loan or line of credit, this could result in paying off a larger chunk of debt sooner, reducing the amount of interest you pay.

For example, let’s say that a company buys a delivery truck for $50,000 that is expected to last ten years and will have a salvage value of $5,000. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. In particular, companies that are publicly traded understand that investors in the market could perceive lower profitability negatively.

How to calculate depreciation using the double declining method

For tax purposes, only prescribed methods by the regional tax authority is allowed. Continuing with the same numbers as the example above, in year 1 the company would have depreciation of $480,000 under the accelerated approach, but only $240,000 under the normal declining balance approach. https://www.bookstime.com/ Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. For reporting purposes, accelerated depreciation results in the recognition of a greater depreciation expense in the initial years, which directly causes early-period profit margins to decline.

The Double Declining Balance Method (DDB) is a form of accelerated depreciation in which the annual depreciation expense is greater during the earlier stages of the fixed asset’s useful life. Double declining balance depreciation allows for higher depreciation expenses in early years and lower expenses as an asset nears the end of its life. 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. In the declining balance method, depreciation rates can be 150%, 200% (double), or 250% of the straight-line rate. When the depreciation rate for the declining balance method is a multiple of doubling the straight-line rate, it is effectively the double-declining balance method.

Step two

The book value of $64,000 multiplied by 20% is $12,800 of depreciation expense for Year 3. 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. (An example might be an apple tree that produces fewer and fewer apples as the years go by.) Naturally, you have to pay taxes on that income.

Therefore, by using the double-declining method, i.e., charging high depreciation expenses in initial years, the company can match the cost with the benefit derived through the use of the asset in a better way. A book value of $64,000 will apply to the asset at the beginning of Year 3. It is calculated by subtracting the fixture’s cost of $100,000 from its accumulated depreciation of $36,000 ($20,000 + $16,000). Based on the book value of $64,000 multiplied by 20%, the depreciation expense for Year 3 is $12,800.