Declining Balance Method of Depreciation Examples

First-year depreciation expense is calculated by multiplying the asset’s full cost by the annual rate of depreciation and time factor. Let’s go through an example using the four normal balance methods of depreciation described so far. Assume that our company has an asset with an initial cost of $50,000, a salvage value of $10,000, and a useful life of five years and 3,000 units, as shown in the screenshot below. Our job is to create a depreciation schedule for the asset using all four types of depreciation.

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Modified Accelerated Cost Recovery System (MACRS) depreciation is a federal income tax convention that benefits companies by helping them plan for the decrease of the value of business assets over a set period. For reasons of simplicity and brevity, the depreciation methods demonstrated in this article use only the required arguments. Several of the depreciation functions include optional arguments to allow for more complex facts, such as partial-year depreciation. Multiply the straight line depreciation rate by 2 to get the double declining depreciation rate. At the beginning of the first year, the fixture’s book value is $100,000 since the fixtures have not yet had any depreciation. Therefore, under the double declining balance method the $100,000 of book value will be multiplied by 20% and will result in $20,000 of depreciation for Year 1.

The Formula for the Double Declining Balance Method

Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. You can calculate the double declining rate by dividing 1 by the asset’s life—which gives you the straight-line rate—and then multiplying that rate by 2. Let’s assume that FitBuilders, a fictitious construction company, purchased a fixed asset worth $12,500 on Jan. 1, 2022. The company estimates that its useful life will be five years and its salvage value at the end of its useful life would be $1,250. 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.

Step 1: Compute the Double Declining Rate

The journal entry will be a debit of $20,000 to Depreciation Expense and a credit of $20,000 to Accumulated Depreciation. The double declining balance method DDB method offers several advantages, particularly for businesses with assets that depreciate quickly. By prioritizing higher depreciation in the early years, it aligns financial records with real-world asset usage and delivers multiple benefits.

DDB Depreciation Formula

• However, when the depreciation rate is determined this way, the method is usually called the double-declining balance depreciation method.
• Generally Accepted Accounting Principles (GAAP) allow for various depreciation methods, including DDB, as long as they provide a systematic and rational allocation of the cost of an asset over its useful life.
• Accumulated depreciation is the sum of all previous years’ depreciation expenses taken over the life of an asset.
• As with the previous example, assume that our company has an asset with an initial cost of $50,000, a salvage value of $10,000, and a useful life of five years and 3,000 units.
• 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.

Now that we have a beginning value and DDB rate, we can fill up the 2022 depreciation expense column. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners. ABC Limited purchased a Machine costing $12500 with a useful life of 5 years. The Machine is real estate cash flow expected to have a salvage value of $2500 at the end of its useful life. When choosing a MACRS depreciation convention, it’s a good idea to use the half-year option over the mid-quarter since the half-year convention helps you buy extra time and saves money. For instance, you could install a computer network in September and itemize 6-month’s worth of depreciation, resulting in more significant tax savings.

Instead, we simply keep deducting depreciation until we reach the salvage value. The current year depreciation is the portion of a fixed asset’s cost that we deduct against current year profit and loss. The accounting concept behind depreciation is that an asset produces revenue over an estimated number of years; therefore, the cost of the asset should be deducted over those same estimated years.

• Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own!
• It is a bit more complex than the straight-line method of depreciation but is useful for deferring tax payments and maintaining low profitability in the early years.
• The declining balance method of Depreciation is also called the reducing balance method, where assets are depreciated at a higher rate in the initial years than in the subsequent years.
• The straight-line method remains constant throughout the useful life of the asset, while the double declining method is highest on the early years and lower in the latter years.
• In year 5, companies often switch to straight-line depreciation and debit Depreciation Expense and credit Accumulated Depreciation for $6,827 ($40,960/6 years) in each of the six remaining years.
• This is to ensure that we do not depreciate an asset below the amount we can recover by selling it.

Differences Between Straight Line Method and Declining Balance Method

• ABC Limited purchased a Machine costing $12500 with a useful life of 5 years.
• If you’d rather not spend time calculating MACRS by hand, consider alternatives to still get the most out of this depreciation method.
• 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.
• One way of accelerating the depreciation expense is the double decline depreciation method.

In contrast, the units of production method ties depreciation expenses directly to the asset’s usage. This approach is useful when the asset’s wear and tear correlate directly with its activity level. For example, a manufacturing machine that depreciates based on the number of units it produces will have expenses that reflect its operational workload.