Double Declining Balance Method DDB Formula + Calculator

Variable-declining balance uses the double-declining factor but also initiates the automatic switch to straight-line depreciation once that is greater than double-declining. With your second year of depreciation totaling $6,720, that leaves a book value of $10,080, which will be used when calculating your third year of depreciation. The following table illustrates double declining depreciation totals for the truck. The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher. This is the fixture’s cost of $100,000 minus its accumulated depreciation of $36,000 ($20,000 + $16,000).

If the company was using the straight-line depreciation method, the annual depreciation recorded would remain fixed at $4 million each period. 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.

However, depreciation expense in the succeeding years declines because we multiply the DDB rate by the undepreciated basis, or book value, of the asset. For specific assets, the newer they are, the faster they depreciate in value. In these situations, the declining balance method tends to be more accurate than the straight-line method at reflecting book value each year. Unlike straight line depreciation, which stays consistent throughout the useful life of the asset, double declining balance depreciation is high the first year, and decreases each subsequent year.

Double Declining Balance Method Formula (DDB)

However, computing the double declining depreciation is very systematic. It’s ideal to have accounting software that can calculate depreciation automatically. The double declining balance depreciation method is a form of accelerated depreciation that doubles the regular depreciation approach. It is frequently used to depreciate fixed assets more heavily in the early years, which allows the company to defer income taxes to later years. Depreciation is the act of writing off an asset’s value over its expected useful life, and reporting it on IRS Form 4562.

Sometimes, when the company is looking to defer the tax liabilities and reduce profitability in the initial years of the asset’s useful life, it is the best option for charging depreciation. We can understand how the depreciation expense is calculated yearly under the double-declining method from the schedule below. For example, last year, the actual depreciation expense, as per the depreciation rate, should have been $13,422 but kept at $12,108.86 to keep the asset at its estimated salvage value. So, the depreciation expense is calculated in the last year by deducting the salvage value from the opening book value.

Depreciation Calculator

Since the double declining balance method has you writing off a different amount each year, you may find yourself crunching more numbers to get the right amount. You’ll also need to take into account how each year’s depreciation affects your cash flow. 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.

• The reason is that it causes the company’s net income in the early years of an asset’s life to be lower than it would be under the straight-line method.
• When you purchase these assets, you’ll have to choose your method of depreciation.
• Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business.
• At its accelerated rate, it has a rate of depreciation double that of the standard declining method.
• Generally, companies will not use the double-declining-balance method of depreciation on their financial statements.

Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own! The best way to understand how it works is to use your own numbers and try building the schedule yourself. The formula used to calculate annual depreciation expense under the double declining method is as follows.

How is the Double Declining Depreciation Calculated?

The double declining balance method of depreciation is just one way of doing that. Double declining balance is sometimes also called the accelerated depreciation method. Businesses use accelerated methods when having assets that are more productive in their early years such as vehicles or other assets that lose their value quickly. Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset.

Businesses use the double declining balance method when an asset loses its value quickly. This method, like other accelerated depreciation methods, counts depreciation expenses faster. In basic terms, this means that the depreciation schedule sees larger losses in a shorter period of time.

The salvage value is what you expect to receive when you dispose of the asset at the end of its useful life. There are various alternative methods that can be used for calculating a company’s annual depreciation expense. Now you’re going to write it off your taxes using the double depreciation balance wave accounting review method. If you’re brand new to the concept, open another tab and check out our complete guide to depreciation. Then come back here—you’ll have the background knowledge you need to learn about double declining balance. Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million.

Double Declining Balance Depreciation Template

We now have the necessary inputs to build our accelerated depreciation schedule. By dividing the $4 million depreciation expense by the purchase cost, the implied depreciation rate is 18.0% per year. The prior statement tends to be true for most fixed assets due to normal “wear and tear” from any consistent, constant usage.

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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. Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. In the first year of service, you’ll write $12,000 off the value of your ice cream truck. It will appear as a depreciation expense on your yearly income statement. Double declining balance depreciation isn’t a tongue twister invented by bored IRS employees—it’s a smart way to save money up front on business expenses.

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. On the whole, DDB is not a generally easy depreciation method to implement. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. In other words, it records how the value of an asset declines over time.

Example of Double Declining Balance Method

If you’re calculating your own depreciation, you may want to do something similar, and include it as a note on your balance sheet. Consider a widget manufacturer that purchases a $200,000 packaging machine with an estimated salvage value of $25,000 and a useful life of five years. Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. The common rounding method considers that, if you owned the asset for more than half the month, you are entitled to the depreciation for that entire month. If you purchase an asset on or before the 15th of the month, you can take the full month’s depreciation.

Conceptually, depreciation is the reduction in the value of an asset over time due to elements such as wear and tear. See the screenshot below for the formulas used in the spreadsheet and the results of the MACRS half-year depreciation calculations. In 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 six remaining years.