The Double Declining Depreciation Method: A Beginner’s Guide

The DDB depreciation method is best applied to assets that quickly lose value in the first few years of ownership. This is most frequently the case for things like cars and other vehicles but may also apply to business assets like computers, mobile devices and other electronics. To calculate the double-declining depreciation expense for Sara, we first need to figure out the depreciation rate.

• In the first year of service, you’ll write $12,000 off the value of your ice cream truck.
• 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 book value of $64,000 multiplied by 20% is $12,800 of depreciation expense for Year 3.
• In DDB depreciation the asset’s estimated salvage value is initially ignored in the calculations.
• He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

If you file estimated quarterly taxes, you’re required to predict your income each year. 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. Bottom line—calculating depreciation with the double declining balance method is more complicated than using straight line depreciation. And if it’s your first time filing with this method, you may want to talk to an accountant to make sure you don’t make any costly mistakes.

Double declining balance method: A depreciation guide

The straight-line depreciation percentage is, therefore, 20%—one-fifth of the difference between the purchase price and the salvage value of the vehicle each year. For the second year of depreciation, you’ll be plugging a book value of $18,000 into the formula, rather than one of $30,000. Next year when you do your calculations, the book value of the ice cream truck will be $18,000.

• Then come back here—you’ll have the background knowledge you need to learn about double declining balance.
• Double declining balance (DDB) depreciation is an accelerated depreciation method.
• 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.
• In the first accounting year that the asset is used, the 20% will be multiplied times the asset’s cost since there is no accumulated depreciation.

(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. If the double-declining depreciation rate is 40%, the straight-line rate of depreciation shall be its half, i.e., 20%. The carrying value of an asset decreases more quickly in its earlier years under the straight line depreciation compared to the double-declining method. Double-declining depreciation charges lesser depreciation in the later years of an asset’s life.

This alignment tends to occur because an asset is most heavily used when it’s new, functional, and most efficient. However, when it comes to taxable income and the related income tax payments, it is a different story. In the U.S. companies are permitted to use straight-line depreciation on their income statements while using accelerated depreciation on their income tax returns. You can find more information on depreciation for income tax reporting at

Here’s a depreciation guide and overview of the double-declining balance method. Depreciation is the process by which you decrease the value of your assets over their useful life. The most commonly used method of depreciation is straight-line; it is the simplest to calculate. However, there are certain advantages to accelerated depreciation methods. 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.

Sara wants to know the amounts of depreciation expense and asset value she needs to show in her financial statements prepared on 31 December each year if the double-declining method is used. If, for example, an asset is purchased on 1 December and the financial statements are prepared on 31 December, the depreciation expense should only be charged for one month. Another thing to remember while calculating the depreciation expense for the first year is the time factor.

Double declining balance depreciation definition

In the last year of an asset’s useful life, we make the asset’s net book value equal to its salvage or residual value. This is to ensure that we do not depreciate an asset below the tax depreciation section 179 deduction and macrs amount we can recover by selling it. It is important to note that we apply the depreciation rate on the full cost rather than the depreciable cost (cost minus salvage value).

How to plan double declining balance depreciation

The declining balance technique represents the opposite of the straight-line depreciation method, which is more suitable for assets whose book value drops at a steady rate throughout their useful lives. This method simply subtracts the salvage value from the cost of the asset, which is then divided by the useful life of the asset. So, if a company shells out $15,000 for a truck with a $5,000 salvage value and a useful life of five years, the annual straight-line depreciation expense equals $2,000 ($15,000 minus $5,000 divided by five).

The value of each change is calculated by subtracting the amount written off from the asset’s book value on its balance sheet. This method of depreciation is especially useful for assets that deteriorate more rapidly in their first few years of use, as the method will reduce deductions as the years go on. As a result, companies will typically choose to use this method of depreciation when dealing with assets that gradually lose value over their useful life. If you’ve ever wondered why your shiny new car takes a huge value hit the first few years you own it, you’re not alone. This form of accelerated depreciation, known as Double Declining Balance (DDB) depreciation, is actually common method companies use to account for the expense of a long-lived asset.

What is the double declining depreciation rate?

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

However, note that eventually, we must switch from using the double declining method of depreciation in order for the salvage value assumption 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. With the constant double depreciation rate and a successively lower depreciation base, charges calculated with this method continually drop. The balance of the book value is eventually reduced to the asset’s salvage value after the last depreciation period. However, the final depreciation charge may have to be limited to a lesser amount to keep the salvage value as estimated. But as time goes by, the fixed asset may experience problems due to wear and tear, which would result in repairs and maintenance costs.

Here’s the depreciation schedule for calculating the double-declining depreciation expense and the asset’s net book value for each accounting period. In case of any confusion, you can refer to the step by step explanation of the process below. First-year depreciation expense is calculated by multiplying the asset’s full cost by the annual rate of depreciation and time factor.

Accelerated depreciation techniques charge a higher amount of depreciation in the earlier years of an asset’s life. One way of accelerating the depreciation expense is the double decline depreciation method. 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. 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.

Because depreciation is accelerated, expenses are higher in earlier periods compared to later periods. Companies may utilize this strategy for taxation purposes, as an accelerated depreciation method will result in a deferment of tax liabilities since income is lower in earlier periods. 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. So the amount of depreciation you write off each year will be different.