How to calculate double declining balance
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One of the most popular methods of depreciation in accounting is the double declining balance method. This accelerated depreciation technique recognizes the higher depreciation expense in the earlier years of an asset’s life than in its later years. This guide will explain how to calculate the double declining balance and provide a step-by-step calculation example.
1. Understanding the Double Declining Balance Method:
The double declining balance method accelerates the rate at which an asset loses its value by applying double the straight-line depreciation rate on the remaining book value throughout the asset’s useful life. It is important to note that this method does not consider any residual value. As such, when using this method, you should closely monitor asset balances, as these may need to be adjusted when their values approach salvage values.
2. The Double Declining Balance Formula:
To calculate the double declining balance, you must first determine the straight-line depreciation rate and then multiply it by 2. Here is the formula:
Double Declining Balance Depreciation = (Cost – Accumulated Depreciation) x (2 x Straight-Line Deprecation Rate)
3. Calculation Example:
Let’s assume you purchased an asset for $10,000 with a useful life of 5 years and no salvage value.
Step 1: Calculate Straight-Line Depreciation Rate:
Divide 1 by the useful life:
Straight-Line Depreciation Rate = 1 / 5 = 0.20 or 20%
Step 2: Determine Double Declining Balance Rate:
Multiply Straight-Line Depreciation Rate by 2:
Double Declining Balance Rate = 20% x 2 = 40%
Step 3: Calculate Annual Depreciation Expense Using Double Declining Balance Method:
Year 1:
Opening book value = Cost – Accumulated Depreciation
Opening book value = $10,000 – $0 = $10,000
Depreciation expense = Opening book value x Double Declining Balance Rate
Depreciation expense = $10,000 x 40% = $4,000
Year 2:
Opening book value = Cost – Accumulated Depreciation
Opening book value = $10,000 – $4,000 = $6,000
Depreciation Expense = Opening book value x Double Declining Balance Rate
Depreciation Expense = $6,000 x 40% = $2,400
You can repeat these calculations for each subsequent year of the asset’s useful life. The double declining balance method allows you to capture higher depreciation expenses during the early years of an asset’s life when it typically has a higher value.
In conclusion, the double declining balance method is an effective way to calculate depreciation expenses for assets whose values diminish rapidly during their initial years of use. By understanding the method and utilizing the formula provided in this article, you’ll be able to accurately account for asset depreciation in your financial records.