Declining Balance Method of Assets Depreciation Pros & Cons

The following examples show the application of the double and 150% declining balance methods to calculate asset depreciation. In the above example, we assumed a depreciation rate equal to twice the straight-line rate. However, many firms use a rate equal to 1.5 times the straight-line rate. Under the declining balance methods, the asset’s salvage value is used as the minimum book value; the total lifetime depreciation is thus the same as under the other methods. The double-declining balance method accelerates the depreciation taken at the beginning of an asset’s useful life. Because of this, it more accurately reflects the true value of an asset that loses value quickly.

The ending book value for the first year becomes the beginning book value for the second year, and so on. The two most common accelerated depreciation methods are double-declining balance and the sum of the years’ digits. Here’s a depreciation guide and overview of the double-declining balance method.

What is a Double Declining Balance?

One method is called partial year depreciation, where depreciation is calculated exactly at when assets start service. Simply select “Yes” as an input in order to use partial year depreciation when using the calculator. 150% declining balance depreciation is calculated in the same manner as is double-declining-balance depreciation, except that the rate is 150% of the https://simple-accounting.org/10-companies-that-hire-for-remote-bookkeeping-jobs/ straight-line rate. Using this information, you can figure the double declining balance depreciation percentage to be ⅖ each year, or 40%. On the other hand, double declining balance decreases over time because you calculate it off the beginning book value each period. It does not take salvage value into consideration until you reach the final depreciation period.

• A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
• The difference is that DDB will use a depreciation rate that is twice that (double) the rate used in standard declining depreciation.
• 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.
• For example, if the equipment in the above case is purchased on 1 October rather than 2 January, depreciation for the period between 1 October and 31 December is ($16,000 x 3/12).

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. As a business owner, a proper calculation of the depreciation value is very important for the organization. Although there are a few types of depreciation methods used for calculating the values of assets, here we will look more particularly into the double declining balance method. 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.

Double declining balance vs. the straight line method

This method is more difficult to calculate than the more traditional straight-line method of depreciation. Also, most assets are utilized at a consistent rate over their useful lives, which does not reflect the rapid rate of depreciation resulting from this method. Further, this approach results in the skewing of profitability results into future periods, Bookkeeping & Accounting for Lawyers which makes it more difficult to ascertain the true operational profitability of asset-intensive businesses. Here, with proper double declining depreciation formula, you can accelerate the depreciation value of the assets. Companies will typically keep two sets of books (two sets of financial statements) – one for tax filings, and one for investors.