Overview of Double Declining Balance Depreciation
The double declining balance method is an accelerated form of depreciation under which the vast majority of the depreciation associated with a fixed asset is recognized during the first few years of its useful life. This approach is reasonable under either of the following two circumstances:
- When the utility of an asset is being consumed at a more rapid rate during the early part of its useful life; or
- When the intent is to recognize more expense now, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes).
However, 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, which makes it more difficult to ascertain the true operational profitability of asset-intensive businesses.
To calculate depreciation under the double declining method, multiply the asset book value at the beginning of the fiscal year by a multiple of the straight-line rate of depreciation. The double declining balance formula is:
Double-declining balance (ceases when the book value = the estimated salvage value)
2 × Straight-line depreciation rate × Book value at the beginning of the year
A variation on this method is the 150% declining balance method, which substitutes 1.5 for the 2.0 figure used in the calculation. The 150% method does not result in as rapid a rate of depreciation at the double declining method.
Example of Double Declining Balance Depreciation
ABC Company purchases a machine for $100,000. It has an estimated salvage value of $10,000 and a useful life of five years. The double declining balance depreciation calculation is:
Net book value,
beginning of year
computed as 2 × SL
rate × beginning NBV
Net book value,
end of year
|5||12,960||2,960||10,000 salvage value|