Declining Balance Method: What It Is, Depreciation Formula

Then, we need to calculate the depreciation rate, explained under the next heading. In the next step, we need to multiply the beginning book value by twice the depreciation rate and deduct the depreciation expense from the beginning value to arrive at the remaining value. We will repeat https://www.bookstime.com/ a similar process each year throughout the asset’s useful life or until we reach the asset’s salvage value. 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.

The double declining balance depreciation rate is twice what straight line depreciation is. For example, if you depreciate your machine using straight line depreciation, your depreciation would remain the same each month. Overall, depreciation is an expense charged to the accounts for a fixed asset. This amount relates to the asset’s value that a company uses during the period. Therefore, it represents the reduction in the value of a fixed asset over the period due to usage.

What Is the Double Declining Balance Method?

This method simply subtracts the salvage value from the cost of the asset, which is then divided by the useful life of the asset. So, if a company shells out $15,000 for a truck with a $5,000 salvage value and a useful life of five years, the annual straight-line depreciation expense equals $2,000 ($15,000 minus $5,000 divided by five). Under the declining balance method, yearly depreciation is calculated by applying a fixed percentage rate to an asset’s double declining balance method 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. This method can be placed between the straight-line method and the double declining balance method, in terms of speed of depreciation. In this method, the yearly depreciation is separated into various fractions based on the number of years in the useful life.

You get more cashback in tax benefits from the beginning, which can help balance the expense of purchasing a resource. In the case that you’ve applied for a line of credit or a loan, you could be paying off a bigger part of the loan in the earlier periods, consequently, decreasing the sum for every period you pay interest on. While depreciation is used for calculating the descending costs of tangible assets, Amortization is used in the case of intangible assets. Calculating DDB depreciation may seem complicated, but it can be easy to accomplish with accounting software.

How to Calculate Double Declining Balance Depreciation

Due to the accelerated depreciation expense, a company’s profits don’t represent the actual results because the depreciation has lowered its net income. With a good look at the concept, let’s set eyes on the benefits of the double declining balance method. The depreciation process for an asset begins when a company puts an asset into use. Therefore, it must generate economic benefits and provide returns for the depreciation to apply. If an asset does not meet the above definition, companies cannot charge depreciation for it. For accounting purposes, companies can use any of these methods, provided they align with the underlying usage of the assets.

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.

Microsoft® Excel® Functions Equivalent: DDB

This process relates to the matching principle in accounting, which requires companies to charge an expense to the period it relates. The term depreciation, in accounting, relates to the allocation of a fixed asset’s cost over its life. In other words, it is an accounting method used to divide an asset’s cost over its useful life or life expectancy.