# Double Declining Balance: A Simple Depreciation Guide Bench Accounting See the screenshot below for the facts of the asset we will depreciate using the variable-declining balance for the MACRS half-year convention. Download thisaccounting examplein excel to help calculate your own Double Declining Depreciation problems.

Next year when you do your calculations, the book value of the ice cream truck will be \$18,000. Recovery period, or the useful life of the asset, is the period over which you’re depreciating it, in years.

## What are Plant Assets? – Financial Accounting

Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business. He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines. Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. Use the formula above to determine your depreciation for the first year.

• It is also commonly used for tax purposes, as it allows for higher tax deductions in the early years of asset ownership.
• The difference is that DDB will use a depreciation rate that is twice that the rate used in standard declining depreciation.
• They do this each year until the final year of the asset’s useful life, where they depreciate any remainder over the asset’s salvage value.
• When double declining balance method does not fully depreciate an asset by the end of its life, variable declining balance method might be used instead.
• Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the asset’s utility is consumed at a more rapid rate during the earlier phases of its useful life.
• The declining balance method is also known as reducing balance method or diminishing balance method.

Because the book value declines as the asset ages and the rate stays constant, the depreciation charge falls each year. Notice in year 5, the truck is only depreciated by \$129 because you’ve reached the salvage value of the truck. Straight line depreciation expense remains the same every year.

## What is the Double Declining Balance Method?

This method requires taking the useful life of an asset and adding up the number of each year (e.g., 5+4+3+2+1 for a five-year useful life). Each year, you divide the number of years left to depreciate the asset by the year-value total. Then you multiply the resulting percentage by the remaining depreciable value of the asset. When a business depreciates an asset, it reduces the value of that asset over time from its cost basis to some ultimate salvage value over a set period of years . By reducing the value of that asset on the company’s books, a business is able to claim tax deductions each year for the presumed lost value of the asset over that year. Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability in the first few years after purchasing them.

• Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly.
• Finally apply a 20% depreciation rate to the carrying value of the asset at the beginning of each year.
• Now, \$ 25,000 will be charged to the income statement as a depreciation expense in the first year, \$ 18,750 in the second year, and so on for eight continuous years.
• Assuming there is no salvage value for the equipment, the business will report \$4 (\$20,000/5,000 items) of depreciation expense for each item produced.
• The double-declining balance and straight-line methods may need to be more accurate in certain situations, as they need to consider the asset’s actual usage and productivity.
• Let’s assume that FitBuilders, a fictitious construction company, purchased a fixed asset worth \$12,500 on January 1, 2022.

The double declining balance method is one of several acceptable methods that can be used to depreciate fixed assets. While the double declining balance method is relatively simple, it may be more complex than other depreciation methods, such as the straight-line method.

## Depreciation Not Based on Years

The resulting amount is then subtracted from the asset’s remaining book value to determine the new book value. This process is repeated each year until the asset’s book value reaches zero or the asset is no longer in use. Double declining depreciation is helpful for businesses that want to recognize expenses upfront to save taxes. It also matches revenues to expenses double declining balance method in that assets usually perform more poorly over time, so more expenses are recognized when the performance and income is higher. Assume a company purchases a piece of equipment for \$20,000 and this piece of equipment has a useful life of 10 years and asalvage valueof \$1,000. The depreciation rate would be calculated by multiplying the straight-line rate by two.
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