Double declining balance depreciation definition
/What is Double Declining Balance Depreciation?
The double declining balance method is an accelerated form of depreciation under which most of the depreciation associated with a fixed asset is recognized during the first few years of its useful life.
How to Calculate Double Declining Balance Depreciation
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.
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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:
Year |
Net book value, beginning of year |
Double-declining balance depreciation computed as 2 × SL rate × beginning NBV |
Net book value, end of year |
|
| 1 | $100,000 | $40,000 | $60,000 | |
| 2 | 60,000 | 24,000 | 36,000 | |
| 3 | 36,000 | 14,400 | 21,600 | |
| 4 | 21,600 | 8,640 | 12,960 | |
| 5 | 12,960 | 2,960 | 10,000 | |
| Total | $90,000 |
Advantages of Double Declining Balance Depreciation
This approach is reasonable when the utility of an asset is being consumed at a more rapid rate during the early part of its useful life. It is also useful 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).
Disadvantages of Double Declining Balance Depreciation
A disadvantage of the double declining method is that it is more difficult to calculate than the more traditional straight-line method of depreciation. Given the difficulty of calculation, this also means that it is easier to calculate the wrong amount 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. In addition, someone comparing the fixed assets line item in a reporting entity’s balance sheet to its accumulated depreciation would erroneously conclude that the firm has a large proportion of older assets; this is caused by the accelerated rate at which depreciation is accumulated in the accounting records. Consequently, there are several serious disadvantages to using the double declining balance method.