Double declining balance depreciation is an accelerated depreciation method that charges twice the rate of straight-line deprecation on the asset’s carrying value at the start of each accounting period. There are four allowable methods for calculating depreciation, and which one a company chooses to use depends on that company’s specific circumstances. Small businesses looking for the easiest approach might choose straight-line depreciation, which simply calculates the projected average yearly depreciation of an asset over its lifespan. Since different assets depreciate in different ways, there are other ways to calculate it. Declining balance depreciation allows companies to take larger deductions during the earlier years of an assets lifespan. Sum-of-the-years’ digits depreciation does the same thing but less aggressively.

Calculating Depreciation Expense Using DDB

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How to Calculate Declining Balance Depreciation

• This method aligns depreciation expense with the asset’s higher productivity and faster obsolescence in the initial period.
• Finally, units of production depreciation takes an entirely different approach by using units produced by an asset to determine the asset’s value.
• Accelerated methods are often used for assets that lose value more quickly due to rapid technological advancements or intensive early usage.
• Each method has its advantages, suited to different types of assets and financial strategies.
• With a book value of $73,000, there is now only $56,000 left to depreciate over seven years, or $8,000 per year.
• The “double” means 200% of the straight line rate of depreciation, while the “declining balance” refers to the asset’s book value or carrying value at the beginning of the accounting period.
• This method can be used to depreciate assets where variation in usage is an important factor, such as cars based on miles driven or photocopiers on copies made.

Finally, units of production depreciation takes an entirely different approach by using units produced by an asset to determine the asset’s value. This depreciation method is used when assets are utilized more in the early years and when assets become obsolete quickly. Using the double declining balance depreciation method increases the depreciation expense, reducing the tax expense and net income in the early years. There are several different depreciation methods and each has its own calculation. The most common method is the straight-line method, which basically involves expensing the same amount for each accounting period. The straight-line method is calculated by subtracting the salvage value from the asset’s purchase price and then dividing the resulting figure by the projected useful life of the asset.

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• Double declining balance depreciation is an accelerated depreciation method that charges twice the rate of straight-line deprecation on the asset’s carrying value at the start of each accounting period.
• Accelerated depreciation methods, such as double declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages.
• Depreciation expense for the year 2021 will therefore equal $1440 ($3600 x 0.4).
• This formula is best for companies with assets that will lose more value in the early years and that want to capture write-offs that are more evenly distributed than those determined with the declining balance method.
• 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 of its cost.
• The double-declining method front loads the depreciation, so you expense more in the earlier years than in the later years of an asset’s useful life.

This method helps businesses recognize higher expenses in the early years, which can be particularly useful for assets that rapidly lose value. Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset. Accelerated depreciation methods, such as double declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages.

After the first year, we apply the depreciation rate to the carrying value (cost minus accumulated depreciation) of the asset at the start of the period. 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. Depreciation using the straight-line method reflects the consumption of the asset over time and is calculated by subtracting the salvage value from the asset’s purchase price. In regards to depreciation, salvage value (sometimes called residual or scrap value) is the estimated worth of an asset at the end of its useful life.

What Are the Different Ways to Calculate Depreciation?

Thus, the methods used in calculating depreciation are typically industry-specific. This formula is best for companies with assets that will lose more value in the early years and that want to capture write-offs https://www.bookstime.com/ that are more evenly distributed than those determined with the declining balance method. This method often is used if an asset is expected to lose greater value or have greater utility in earlier years.