The double declining balance depreciation method, a commonly used technique in accounting, provides an accelerated depreciation rate for assets over their useful life. Unlike the straight-line method, which allocates an equal depreciation expense in each period, the double declining balance method assigns larger expenses in the earlier years of an asset’s life and smaller expenses in the later years. The depreciation rate, applied to the asset’s book value, is calculated by multiplying the applicable straight-line rate by two. As a result, this method results in higher depreciation expenses in the early years, leading to lower taxable income and increased cash flow.
Double Declining Balance Depreciation Method
The double declining balance depreciation method is an accelerated depreciation method that allocates more depreciation expense to the early years of an asset’s life. This method is most commonly used for assets that are expected to decline in value rapidly, such as computers and machinery.
Calculation
The double declining balance depreciation rate is calculated by multiplying the straight-line depreciation rate by 2. The straight-line depreciation rate is calculated by dividing the cost of the asset by its useful life.
For example, if an asset costs $10,000 and has a useful life of 5 years, the straight-line depreciation rate would be 20% (100% / 5). The double declining balance depreciation rate would be 40% (20% x 2).
Depreciation Expense
The depreciation expense for each year is calculated by multiplying the book value of the asset at the beginning of the year by the depreciation rate. The book value of an asset is its cost minus the accumulated depreciation.
For example, if the asset in the previous example had a book value of $8,000 at the beginning of year 2, the depreciation expense for year 2 would be $3,200 (8,000 x 40%).
Example
The following table shows the depreciation schedule for an asset that costs $10,000 and has a useful life of 5 years:
| Year | Book Value at Beginning of Year | Depreciation Rate | Depreciation Expense |
|---|---|---|---|
| 1 | $10,000 | 40% | $4,000 |
| 2 | $6,000 | 40% | $2,400 |
| 3 | $3,600 | 40% | $1,440 |
| 4 | $2,160 | 40% | $864 |
| 5 | $1,296 | 40% | $518.40 |
Question 1:
How does the double declining balance depreciation method calculate depreciation?
Answer:
The double declining balance depreciation method multiplies the book value of an asset by a rate that is twice the straight-line depreciation rate.
Question 2:
What is the formula for calculating depreciation using the double declining balance method?
Answer:
Depreciation = (2 * Straight-line depreciation rate) * Book value
Question 3:
Why is the double declining balance depreciation method not used as often as the straight-line depreciation method?
Answer:
The double declining balance depreciation method is not as commonly used as the straight-line method because it results in a higher depreciation expense in the early years of an asset’s life, which can lead to a lower taxable income and higher tax liability.
And that’s the double declining balance depreciation method in a nutshell! It’s a useful tool for businesses that want to depreciate their assets more quickly, but it’s important to consider its pros and cons before making a decision. Thanks for reading, and be sure to visit again soon for more accounting and finance tips!