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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 company would deduct \$9,000 in the first year, but only \$7,200 in the second year. Using the straight-line depreciation method requires the estimation of useful life and salvage or residual value of the asset. The difference between the original cost of the asset and the salvage value gives the depreciable cost. This is the total amount of depreciation that needs to be expensed in equal amounts across its useful life.

## Double Declining Balance Method Formula (DDB)

In that case, we will charge depreciation only for the time the asset was still in use (partial year). Like in the first year calculation, we will use a time factor for the number of months the asset was in use but multiply it by its carrying value at the start of the period instead double declining balance method of its cost. Since the assets will be used throughout the year, there is no need to reduce the depreciation expense, which is why we use a time factor of 1 in the depreciation schedule (see example below). For specific assets, the newer they are, the faster they depreciate in value.

In the DDB method, the shorter the useful life, the more rapidly the asset depreciates. It’s important to accurately estimate the useful life to ensure proper financial https://www.bookstime.com/ reporting. With declining balance methods of depreciation, when the asset has a salvage value, the ending Net Book Value should be the salvage value.

## Definition of Double Declining Balance Method of Depreciation

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. Don’t worry—these formulas are a lot easier to understand with a step-by-step example. Recovery period, or the useful life of the asset, is the period over which you’re depreciating it, in years. Continuing with the same numbers as the example above, in year 1 the company would have depreciation of \$480,000 under the accelerated approach, but only \$240,000 under the normal declining balance approach.

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. In this way, the company is not only saving more money, but those deductions also correlate with how rapidly the asset will decline.

## How can Taxfyle help?

Although both DDB and declining depreciation are considered accelerated methods; however, double declining balance uses a depreciation rate that is twice that in the simple declining depreciation. The benefit of using an accelerated depreciation method like the double declining balance is two-fold. 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. 1- You can’t use double declining depreciation the full length of an asset’s useful life. Since it always charges a percentage on the base value, there will always be leftovers.

• Employing the accelerated depreciation technique means there will be smaller taxable income in the earlier years of an asset’s life.
• The balance of the book value is eventually reduced to the asset’s salvage value after the last depreciation period.
• The depreciation expense calculated by the double declining balance method may, therefore, be greater or less than the units of output method in any given year.
• This method balances between the Double Declining Balance and Straight-Line methods and may be preferred for certain assets.
• For example, last year, the actual depreciation expense, as per the depreciation rate, should have been \$13,422 but kept at \$12,108.86 to keep the asset at its estimated salvage value.