It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. Now, $ 25,000 will be charged to the income statement as a depreciation expense in the first year, $ 18,750 in the second year, and so on for double declining balance formula eight continuous years. Although all the amount is paid for the machine at the time of purchase, the expense is charged over time. Instead, the asset will depreciate by the same amount; however, it will be expensed higher in the early years of its useful life.

Under a 40% DDB depreciation rate, the book value of the same asset two years later would only be $40,320. The value of the asset at the end of the period is the book https://www.bookstime.com/ value at the beginning of the period minus the depreciation amount calculated above. Our ending book value is the beginning book value less depreciation expense.

Example of Double Declining Balance Method

Under IRS rules, vehicles are depreciated over a 5 year recovery period. In later years, as maintenance becomes more regular, you’ll be writing off less of the value of the asset—while writing off more in the form of maintenance. So your annual write-offs are more stable over time, which makes income easier to predict. There are a few benefits to the double depreciation method. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.

• It is applicable to the assets which are used for years and the usage declines with the passage of time.
• They have estimated the machine’s useful life to be eight years, with a salvage value of $ 11,000.
• How do you calculate the sum of the years’ digits method of depreciation?
• For instance, if an asset’s estimated useful life is 10 years, the straight-line rate of depreciation is 10% (100% divided by 10 years) per year.
• The company ABC estimates that the machine has 4 years of useful life with a salvage value of $500 at the end of its useful life.
• The life of an asset means the number of years up to which the asset will run efficiently and would be able to generate revenue for the company.

Make sure the asset’s book value does not fall below its salvage value. Though the double declining balance method may dictate that an expense should be made that would push the asset’s book value below its projected salvage value, this is not acceptable. When this happens, the correct expense amount is the amount that makes the asset’s book value the same as its salvage value.

How to Calculate Double Declining Balance Depreciation

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. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability in the first few years after purchasing them. Companies will typically keep two sets of books – one for tax filings, and one for investors.

• Suppose that a company has purchased a machine worth $1,200,000 with an economic life of 5 years.
• The amortization of intangibles is the process of expensing the cost of an intangible asset over the projected life of the asset.
• Double declining balance depreciation is a good depreciation option when you purchase an asset that loses more value in its early years.
• Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
• It is calculated for intangible assets as the actual cost less amortization expense/impairments.
• For example, you purchase a truck for your delivery service.
• To implement the double-declining depreciation formula for an Asset you need to know the asset’s purchase price and its useful life.

If the company chose to deduct 10% of the asset’s value each year for ten years under straight-line depreciation, the amount of depreciation per year would only change slightly. The company would deduct $4,500 in year one and $4,050 in year two. Generally speaking, DDB depreciation rates can be 150%, 200%, or 250% of straight-line depreciation. In the case of 200%, the asset will depreciate twice as fast as it would under straight-line depreciation. The DDB depreciation method causes an asset to depreciate far more quickly than it would under the straight-line depreciation method.

What is depreciation?

This method assumes that an asset is more productive in its initial years, and slowly and steadily, its productivity reduces. Therefore, the revenue generation will be more in the initial years, and to match the revenues, more depreciation is charged in those years. 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.

Over the depreciation process, the double depreciation rate remains constant and is applied to the reducing book value each depreciation period. The book value, or depreciation base, of an asset, declines over time. To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator. It’s a good way to see the formula in action—and understand what kind of impact double declining depreciation might have on your finances. Enter the straight line depreciation rate in the double declining depreciation formula, along with the book value for this year. If something unforeseen happens down the line—a slow year, a sudden increase in expenses—you may wish you’d stuck to good old straight line depreciation. While double declining balance has its money-up-front appeal, that means your tax bill goes up in the future.

Life of Asset

Every year you write off part of a depreciable asset using double declining balance, you subtract the amount you wrote off from the asset’s book value on your balance sheet. Starting off, your book value will be the cost of the asset—what you paid for the asset. The result is your basic depreciation rate, expressed as a decimal. (You can multiply it by 100 to see it as a percentage.) This is also called the straight line depreciation rate—the percentage of an asset you depreciate each year if you use the straight line method. Another form of this method, the 150% declining balance method, simply multiplies the straight line depreciation rate by 1.5, rather than by 2.

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. Consider combining the double declining method with another method. The depreciation expense using double declining depreciation would be 40% of the starting book value at $720, or $288. This would be less than the expense calculated using straight-line depreciation, which would just be 20% of the original value of $2,000, or $400. The company can calculate double declining balance depreciation after determining the estimated useful life of the fixed asset.