Double Declining Balance Method: Formula & Free Template

Visit QuickBooks Online now and get 50% off for three months plus a free guided setup. Depletion and amortization are similar concepts for natural resources (including oil) and intangible assets, respectively. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Insights on business strategy and culture, right to your inbox.Part of the business.com network. Next year when you do your calculations, the book value of the ice cream truck will be $18,000. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

• Typically, accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double declining.
• This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset’s life.
• Double declining balance (DDB) depreciation is an accelerated depreciation method.
• The double declining balance method accelerates depreciation charges instead of allocating it evenly throughout the asset’s useful life.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. Thus, an increase in the cost of repairs of each subsequent year is compensated by a decrease in the amount of depreciation for each subsequent year. By contrast, the opposite is true when applying the straight-line method, the unit-of-production method, and the sum-of-the-years-digits method.

150% declining balance depreciation is calculated in the same manner as is double-declining-balance depreciation, except that the rate is 150% of the straight-line rate. FitBuilders estimates that the residual or salvage value at the end of the fixed asset’s life is $1,250. Since we already have an ending book value, let’s squeeze in the 2026 depreciation expense by deducting $1,250 from $1,620. The current year depreciation is the portion of a fixed asset’s cost that we deduct against current year profit and loss. The accounting concept behind depreciation is that an asset produces revenue over an estimated number of years; therefore, the cost of the asset should be deducted over those same estimated years.

Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly. 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. The double-declining balance method is one of the depreciation methods used in entities nowadays.

Depreciable basis

Double declining balance (DDB) depreciation is an accelerated depreciation method. DDB depreciates the asset value at twice the rate of straight line depreciation. The depreciation expense recorded under the double declining method is calculated by multiplying the accelerated rate, 36.0% by the beginning PP&E balance in each period. Of course, the pace at which the depreciation expense is recognized under accelerated depreciation methods declines over time. The formula used to calculate annual depreciation expense under the double declining method is as follows. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life.

Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million. Is a form of accelerated depreciation in which first-year depreciation is twice the amount of straight-line depreciation when a zero terminal disposal price is assumed. Because twice the straight-line rate is generally used, this method is often referred to as double-declining balance depreciation.

The company in the future may want to allocate as little depreciation expenses as possible to help with additional expenses. The double-declining-balance method is used to calculate an asset’s accelerated rate of depreciation against its non-depreciated balance during earlier years of assets useful life. Depreciation ceases when either the salvage value or the end of the asset’s useful life is reached. Bottom line—calculating depreciation with the double declining balance method is more complicated than using straight line depreciation. And if it’s your first time filing with this method, you may want to talk to an accountant to make sure you don’t make any costly mistakes. A variation on this method is the 150% declining balance method, which substitutes 1.5 for the 2.0 figure used in the calculation.

Example of Double Declining Balance Method

Accelerated depreciation techniques charge a higher amount of depreciation in the earlier years of an asset’s life. One way of accelerating the depreciation expense is the double decline depreciation method. With our straight-line depreciation rate calculated, our next step is to simply multiply that straight-line depreciation rate by 2x to determine the double declining depreciation rate. When an asset is sold, debit cash for the amount received and credit the asset account for its original cost. Under the composite method, no gain or loss is recognized on the sale of an asset. Theoretically, this makes sense because the gains and losses from assets sold before and after the composite life will average themselves out.

Formula

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. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

Advantages of the Declining Balance Method

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. 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. As an alternative to systematic allocation schemes, several declining balance methods for calculating depreciation expenses have been developed. Aside from DDB, sum-of-the-years digits and MACRS are other examples of accelerated depreciation methods. They also report higher depreciation in earlier years and lower depreciation in later years.

How Does DDB Differ From Declining Depreciation?

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. Current book value is the asset’s net value at the start of an accounting period, calculated by deducting the accumulated depreciation from the cost of the fixed asset. Residual value is the estimated 20 best business tools for startups software for startups salvage value at the end of the useful life of the asset. And the rate of depreciation is defined according to the estimated pattern of an asset’s use over its useful life. For example, if an asset costing $1,000, with a salvage value of $100 and a 10-year life depreciates at 30% each year, then the expense is $270 in the first year, $189 in the second year, $132 in the third year, and so on.

Whether you are using accounting software, a manual general ledger system, or spreadsheet software, the depreciation entry should be entered prior to closing the accounting period. 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. Using the steps outlined above, let’s walk through an example of how to build a table that calculates the full depreciation schedule over the life of the asset.

However, the total amount of depreciation expense during the life of the assets will be the same. The double declining balance method accelerates depreciation charges instead of allocating it evenly throughout the asset’s useful life. Proponents of this method argue that fixed assets have optimum functionality when they are brand new and a higher depreciation charge makes sense to match the fixed assets’ efficiency. If a company often recognizes large gains on sales of its assets, this may signal that it’s using accelerated depreciation methods, such as the double-declining balance depreciation method. Net income will be lower for many years, but because book value ends up being lower than market value, this ultimately leads to a bigger gain when the asset is sold. If this asset is still valuable, its sale could portray a misleading picture of the company’s underlying health.