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. 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.

But you can reduce that tax obligation by writing off more of the asset early on. As years go by and you deduct less of the asset’s value, you’ll also be making less income from the asset—so the two balance out. 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. We now have the necessary inputs to build our accelerated depreciation schedule.

In DDB depreciation the asset’s estimated salvage value is initially ignored in the calculations. However, the depreciation will stop when the asset’s book value is equal to the estimated salvage value. Businesses choose to use the Double Declining Balance Method when they want to accurately reflect the asset’s wear and tear pattern over time. So, in the first year, the company would record a depreciation expense of $4,000. As a result, at the end of the first year, the book value of the machinery would be reduced to $6,000 ($10,000 – $4,000). 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.

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You’ll also need to take into account how each year’s depreciation affects your cash flow. Hence, our calculation of the depreciation expense in Year 5 – the final year of our fixed asset’s useful life – differs from the prior periods. However, note that eventually, we must switch from using the double declining method of depreciation in order for the salvage value assumption when is the end of this quarter to be met. Since we’re multiplying by a fixed rate, there will continuously be some residual value left over, irrespective of how much time passes. The steps to determine the annual depreciation expense under the double declining method are as follows. The importance of the double-declining method of depreciation can be explained through the following scenarios.

• Then come back here—you’ll have the background knowledge you need to learn about double declining balance.
• Another thing to remember while calculating the depreciation expense for the first year is the time factor.
• It involves more complex calculations but is more accurate than the Double Declining Balance Method in representing an asset’s wear and tear pattern.

The double declining balance method (DDB) describes an approach to accounting for the depreciation of fixed assets where the depreciation expense is greater in the initial years of the asset’s assumed useful life. 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 DDB method involves multiplying the book value at the beginning of each fiscal year by a fixed depreciation rate, which is often double the straight-line rate. This method results in a larger depreciation expense in the early years and gradually smaller expenses as the asset ages.

Benefits of the Double Declining Balance Depreciation Method

The Units of Output Method links depreciation to the actual usage of the asset. It is particularly suitable for assets whose usage varies significantly from year to year. This approach ensures that depreciation expense is directly tied to an asset’s production or usage levels.

Straight Line Depreciation Method

Calculating DDB depreciation may seem complicated, but it can be easy to accomplish with accounting software. To see which software may be right for you, check out our list of the best accounting software or some of our individual product reviews, like our Zoho Books review and our Intuit QuickBooks accounting software review. Just because you may need to calculate your depreciation amount manually each year doesn’t mean you can change methods. 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.

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. The double-declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset.

How Does the DDB Method Work?

However, if the company chose to use the DDB depreciation method for the same asset, that percentage would increase to 20%. The company would deduct $9,000 in the first year, but only $7,200 in the second year. The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher. Once the asset is valued on the company’s books at its salvage value, it is considered fully depreciated and cannot be depreciated any further. However, if the company later goes on to sell that asset for more than its value on the company’s books, it must pay taxes on the difference as a capital gain.

Example of Sum-of-the-Years’-Digits Depreciation

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. 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. Double declining balance (DDB) depreciation is an accelerated depreciation method. DDB depreciates the asset value at twice the rate of straight line depreciation. Companies will typically keep two sets of books (two sets of financial statements) – one for tax filings, and one for investors.

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. Now the double declining balance depreciation rate is calculated by doubling the straight-line rate. Depreciation is a crucial concept in business accounting, representing the gradual loss of value in an asset over time.

The theory is that certain assets experience most of their usage, and lose most of their value, shortly after being acquired rather than evenly over a longer period of time. This method takes most of the depreciation charges upfront, in the early years, lowering profits on the income statement sooner rather than later. For instance, the original book value of an asset was $112,000, the year-end book value of the same asset will decrease due to depreciation.

Note that the estimated salvage value of $8,000 was not considered in calculating each year’s depreciation expense. In our example, the depreciation expense will continue until the amount in Accumulated Depreciation reaches a credit balance of $92,000 (cost of $100,000 minus $8,000 of salvage value). The “declining-balance” refers to the asset’s book value or carrying value (the asset’s cost minus its accumulated depreciation). Recall that the asset’s book value declines each time that depreciation is credited to the related contra asset account Accumulated Depreciation.