Home » Bookkeeping articles » What is the double declining balance method of depreciation?

# What is the double declining balance method of depreciation?

July 29, 2024
Bill Kimball

Some companies use accelerated depreciation methods to defer their tax obligations into future years. It was first enacted and authorized under the Internal Revenue Code in 1954, and it was a major change from existing policy. First, determine the annual depreciation expense using the straight line method. This is done by subtracting the salvage value from the purchase cost of the asset, then dividing it by the useful life of the asset.

## Step four

The “double” means 200% of the straight line rate of depreciation, while the “declining balance” refers to the asset’s book value or carrying value at the beginning of the accounting period. In this approach, the asset is depreciated at double the rate as compared to straight-line depreciation. 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. Through this example, we can see how the DDB method allocates a larger depreciation expense in the early years and gradually reduces it over the asset’s useful life. This approach matches the higher usage and faster depreciation of the car in its initial years, providing a more accurate reflection of its value on the company’s financial statements.

## Double declining balance depreciation definition

This cycle continues until the book value reaches its estimated salvage value or zero, at which point no further depreciation is recorded. Per guidance from management, the PP&E will have a useful life of 5 years and a salvage value of \$4 million. We’ll now move on to a modeling exercise, which you can access by filling out the form below. In particular, companies that are publicly traded understand that investors in the market could perceive lower profitability negatively.

## Step two

We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting. AI-powered accounting software can significantly streamline these depreciation calculations. By automating the complex calculations required for methods like DDB, AI ensures accuracy and saves valuable time. These tools can quickly adjust book values, generate detailed financial reports, and adapt to various depreciation methods as needed.

## Double-Declining Balance (DDB) Depreciation Formula

1. In this, the depreciation rate is twice the rate used in the straight-line method.
2. But you can reduce that tax obligation by writing off more of the asset early on.
3. That means you get the biggest tax write-offs in the years right after you’ve purchased vehicles, equipment, tools, real estate, or anything else your business needs to run.

Enter the straight line depreciation rate in the double declining depreciation formula, along with the book value for this year. When accountants use double declining appreciation, they track the accumulated depreciation—the total amount they’ve already appreciated—in their books, right beneath where the value of the asset is listed. If you’re calculating your own depreciation, you may want to do something similar, and include it as a note on your balance sheet. Leveraging AI in accounting allows businesses to focus on strategic decision-making, reduce errors, and enhance overall financial management. By integrating AI, companies can ensure precise and efficient handling of their asset depreciation, ultimately improving their financial operations. Multiply the straight line depreciation rate by 2 to get the double declining depreciation rate.

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. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly. The double declining balance method is considered accelerated because it recognizes higher depreciation expense in the early years of an asset’s life. By applying double the straight-line depreciation rate to the asset’s book value each year, DDB reduces taxable income initially. The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a form of accelerated depreciation.

This method helps businesses recognize higher expenses in the early years, which can be particularly useful for assets that rapidly lose value. 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. Accelerated depreciation methods, such as double declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset.

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). Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. This method is often chosen when the asset’s value depreciates more rapidly in its early years, reflecting a more realistic depreciation pattern. Next year when you do your calculations, the book value of the ice cream truck will be \$18,000. This can make profits seem abnormally low, but this isn’t necessarily an issue if the business continues to buy and depreciate new assets on a continual basis over the long term.

The Double Declining Balance Depreciation method is best suited for situations where assets are used intensively in their early years and/or when assets tend to become obsolete relatively quickly. Instead of multiplying by our fixed rate, we’ll link the end-of-period balance in Year 5 to our salvage value assumption. However, one counterargument is that it often takes time for companies to utilize the full capacity of an asset until some time has passed.

When changing depreciation methods, companies should carefully justify the change and adhere to accounting standards and tax regulations. Additionally, any changes must be disclosed in the financial statements to maintain transparency and comparability. Of course, the pace at which the depreciation expense is recognized under accelerated depreciation methods declines over time.

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. On the other hand, with the double declining balance depreciation method, you write off a large depreciation expense in the early years, right after you’ve purchased an asset, and less each year after that. This depreciation method is used when assets are utilized more in the early years and when assets become obsolete quickly. Using the double declining balance depreciation method increases the depreciation expense, reducing the tax expense and net income in the early years. Double declining balance depreciation allows for higher depreciation expenses in early years and lower expenses as an asset nears the end of its life.

The most basic type of depreciation is the straight line depreciation method. So, if an asset cost \$1,000, you might write off \$100 every year for 10 years. HighRadius offers a cloud-based Record to Report Suite that helps accounting professionals streamline and automate the financial close process for businesses.

Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time. The declining balance method is one of the two accelerated depreciation methods and it uses a depreciation rate that is some multiple of the straight-line method rate. The double-declining balance (DDB) method is a type of declining balance method that instead uses double the normal depreciation rate.

As a hypothetical example, suppose a business purchased a \$30,000 delivery truck, which was expected to last for 10 years. Under the straight-line depreciation method, the company would deduct \$2,700 per year for 10 years–that is, \$30,000 minus \$3,000, divided by 10. (An example might be an apple tree that produces fewer and fewer apples as the years go by.) Naturally, you have to pay taxes on that income. 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.

The 150% method does not result in as rapid a rate of depreciation at the double declining method. DDB is a specific form of declining balance depreciation that doubles the straight-line rate, accelerating expense recognition. Standard declining balance uses a fixed percentage, but not necessarily double. Both methods reduce depreciation expense over time, but DDB does so more rapidly. To illustrate the double declining balance method in action, let’s use the example of a car leased by a company for its sales team.

When the depreciation rate for the declining balance method is set as a multiple, doubling the straight-line rate, the declining balance method is effectively the double-declining balance method. Over the depreciation process, the double depreciation rate remains constant and is applied to the reducing book value each depreciation period. To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The beginning of period (BoP) book value of the PP&E for Year 1 is linked to our purchase cost cell, i.e.

The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it. The DDB method accelerates depreciation, allowing businesses to write off the cost of an asset more quickly in the early years, which can be incredibly beneficial for tax purposes and financial planning.