Double Declining Balance Method
The double declining balance method is an accelerated depreciation method that multiplies twice the straight-line depreciation method.
What is the Double Declining Balance Method?
The double declining balance method is an accelerated depreciation method that multiplies twice the straight line depreciation percentage per year by the beginning book value of an asset to calculate the period’s depreciation expense. Companies use depreciation to spread the cost of an asset out over its useful life.
What is An Accelerated Depreciation Method?
Common depreciation methods include:
- Straight line method
- Units of output method
- Double declining balance method
- Sum-of-the-years’-digits method
The latter two are considered accelerated depreciation methods because they can be used by a company to claim greater depreciation expense in the early years of the asset’s useful life. At the end of an asset’s useful life, the total accumulated depreciation adds up to the same amount under all depreciation methods. Accumulated depreciation is the sum of all previous years’ depreciation expenses taken over the life of an asset. It is presented as a negative number on the balance sheet in the asset section.
Depreciation expense, on the other hand, is recorded on the company’s income statement. Depreciation expense decreases the company’s net income. As an accelerated depreciation method, when a company uses the double declining balance method, the bulk of the depreciation expense is recorded in the earlier years with minimal depreciation expense taken in the later years of the asset’s useful life.
Double Declining Balance Method Formula
The formula for double declining balance method is:
Annual Depreciation Expense = 2 x Straight Line Depreciation Percentage x Beginning Book Value
Where:
- Straight line depreciation percentage = percentage of total depreciation booked in each year
- Beginning book value = book value at the beginning of the period for which depreciation expense is being calculated
Double Declining Balance Method Example
XYZ Company purchased a new machine for $20,000. XYZ Company has estimated the salvage value, also known as residual value, of the machine to be $5,000 at the end of its five-year useful life. The depreciable base is, therefore, $15,000.
- Depreciable Base = $20,000 original cost - $5,000 salvage value = $15,000
Under straight line depreciation, XYZ Company would recognize $3,000 in depreciation expense each year. The straight-line depreciation percentage is ⅕ each year, or 20%.
- Annual Depreciation Expense = $15,000 depreciable base / 5 year useful life = $3,000
- Straight Line Depreciation Percentage = 1 year / 5 year useful life = 20%
Using this information, you can figure the double declining balance depreciation percentage to be ⅖ each year, or 40%.
- Double Declining Balance Depreciation Percentage = 2 x 20% = 40%
The key to calculating the double declining balance method is to start with the beginning book value– rather than the depreciable base like straight-line depreciation. The beginning book value is multiplied by the doubled rate that was calculated above. The depreciation expense is then subtracted from the beginning book value to arrive at the ending book value. The ending book value for the first year becomes the beginning book value for the second year, and so on.
The biggest thing to be aware of when calculating the double declining balance method is to stop depreciating the asset when you arrive at the salvage value. In our XYZ Company example above, 40% of $7,200 is $2,880. However, if you subtract $2,880 from $7,200, the result is $4,320. That is less than the $5,000 salvage value determined at the beginning of the asset’s useful life. In this case, the amount should be limited to $2,200. Note, there is no depreciation expense in years 4 or 5 under the double declining balance method.
- Limit of final year’s depreciation expense = $7,200 beginning balance - $5,000 salvage value = $2,200
For comparison’s sake, this is what XYZ Company would book for depreciation expense every year under the straight line depreciation method versus double declining balance depreciation method.
As you can see, both methods end up with the same total accumulated depreciation. The only difference between a straight-line depreciation and a double declining depreciation is the rate at which the depreciation happens. The straight-line method remains constant throughout the useful life of the asset, while the double declining method is highest on the early years and lower in the latter years.
Why Use the Double Declining Balance Method?
The benefit of using an accelerated depreciation method like the double declining balance is two-fold.
- It can more accurately link the cost of an asset with its use when the asset loses a greater portion of its value up front. For example, when you drive a new car off the lot, your car loses the greatest value in the first few years of your ownership.
- It is also beneficial from a tax perspective because the higher depreciation expense lowers taxable income in the earlier years. The company has already paid the money necessary to purchase the asset, and this allows them to take a greater percentage of the depreciation expense earlier.
Double Declining Balance Method Versus Other Depreciation Methods
Straight-Line Depreciation Method
Compared to the straight line method of depreciation, double declining balance method accelerates depreciation expense in the earlier years of the asset’s life. The formula for straight line depreciation is:
Annual depreciation expense = (Original cost - Salvage Value) / Useful life
Where you subtract the salvage value of an asset from its original cost and divide the resulting number– the asset’s depreciable base– by the number of years in its useful life. Straight line is the most common method of depreciation, due mainly to its simplicity. Double declining balance is the second most common depreciation method.
Sum-of-the-Years’ Digits Method
Like the double declining balance method, the sum-of-the-years’ digits method is another accelerated depreciation method. It is calculated by multiplying a fraction by the asset’s depreciable base in each year. The fraction uses the sum of all years’ digits as the denominator and starts with the largest digit in year 1 for the numerator. For example, a company that owns an asset with a useful life of five years will multiply the depreciable base by 5/15 in year 1, 4/15 in year 2, 3/15 in year 3, 2/15 in year 4, and 1/15 in year 5.
Where:
- Sum of Years’ Digits = 5+4+3+2+1 = 15
- Largest Digit (Year 1) = 5
Units of Output Method
The units of output method is based on an asset’s consumption of measurable units. It is most likely to be used when tracking machine hours on a machine that has a useful life of a given number of total machine hours. Since it is based on consumption, it could fluctuate by the year. The depreciation expense calculated by the double declining balance method may, therefore, be greater or less than the units of output method in any given year.
Additional Resources
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