Double Declining Balance Method: A Beginners Guide To Calculating Depreciation

double declining balance formula

The maintenance costs would be deducted from the organization’s reported benefits. In this way, an organization can allocate reduced depreciation in later years. The double declining balance strategizes depreciation costs in a declining format in later years. Doing so helps to counterbalance the expanded maintenance costs with fewer depreciation costs. Simply put, the early years of an asset records lesser repairs expense but the depreciation expense will be higher. Whereas, the later years record a higher expense for repairs and the depreciation will be lower.

Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own! The best way to understand how it works is to use your own numbers and try building the schedule yourself. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time. The depreciation expense recorded under the double declining method is calculated by multiplying the accelerated rate, 36.0% by the beginning PP&E balance in each period.

Double declining balance depreciation definition

The beginning of period (BoP) book value of the PP&E for Year 1 is linked to our purchase cost cell, i.e. Per guidance from management, the PP&E will have a useful life of 5 years and a salvage value of $4 million. However, the management teams of public companies tend to be short-term oriented due to the requirement to report quarterly earnings (10-Q) and uphold their company’s share price. In particular, companies that are publicly traded understand that investors in the market could perceive lower profitability negatively. Deskera is an all-in-one software that can overall help with your business to bring in more leads, manage customers and generate more revenue. With Deksera CRM you can manage contact and deal management, sales pipelines, email campaigns, customer support, etc.

The key to calculating the double declining balance method is to start with the beginning book value– rather than the depreciable base like straight-line depreciation. The beginning book value is multiplied by the doubled rate that was calculated above. The depreciation expense is then subtracted from the beginning book value to arrive at the ending book value. The ending book value for the first year becomes the beginning book value for the second year, and so on.

Example of the double declining balance method

Where you subtract the salvage value of an asset from its original cost and divide the resulting number– the asset’s depreciable base– by the number of years in its useful life. Straight line is the most common method of depreciation, due mainly to its simplicity. A variation on this method is the 150% declining balance method, which substitutes 1.5 for the 2.0 figure used in the calculation.

With other assets, we may find we would be taking more depreciation than we should. In the last year, ignore the formula and take the amount of depreciation needed to have an ending Net Book Value equal to the Salvage Value. Deskera can also help with your inventory management,  customer relationship management, HR, attendance and payroll management software. Deskera can help you generate payroll and payslips in minutes with Deskera People.

Why Use the Double Declining Balance Method?

For example, if an asset has a salvage value of $8000 and is valued in the books at $10,000 at the start of its last accounting year. In the final year, the asset will be further depreciated by $2000, ignoring the rate of depreciation. We can incorporate this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12. 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. In the accounting period in which an asset is acquired, the depreciation expense calculation needs to account for the fact that the asset has been available only for a part of the period (partial year).

  • Owing to an increased rate of depreciation, it is termed accelerated depreciation.
  • For reporting purposes, accelerated depreciation results in the recognition of a greater depreciation expense in the initial years, which directly causes early-period profit margins to decline.
  • Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million.
  • If the company was using the straight-line depreciation method, the annual depreciation recorded would remain fixed at $4 million each period.
  • 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.