Definition and formula
The double declining balance method is the most popular variation of the accelerated depreciation method. Here, the depreciation rate is higher at the start of the asset’s life. This particular method never completely reduces the asset value to zero – when the net book value becomes insignificant in comparison to its original cost, it is completely written off in the last year of its useful life.
Note that the Asset Cost minus the Accumulated Depreciation portion of the equation is simply the current book value of the asset.
Pros and Cons
Any method of accounting for depreciation has its pros and cons. Their presence is due to the specifics of the application of each of them. The positive aspects of using this method include:
- possibility of including most of the asset’s cost in the cost of products during the first half of the life cycle
- ensuring the highest efficiency of investments in fixed assets
- ability to reduce taxes
- possibility of depreciating production equipment.
The disadvantages include the following points:
- inability to write off the entire residual value of the asset
- cannot be applied to the equipment, the service life of which is less than three years
- inappropriate for accounting for the wear and tear of furniture, as well as buildings and structures
- cannot be applied to equipment for production of certain limited types of products.
Johnson’s cars bought equipment for $380,500. The useful life is estimated to be 4 years and a salvage value – $85,000. Let’s calculate depreciation for the 2nd year using the double declining balance method.
- First, we need to calculate the depreciation expense for the first year. Into the formula above, we will input the following data: asset cost -$380,500, accumulated depreciation – $0, and the useful life – 4 years. We get $190,250 of depreciation expense in the first year.
- We will use the same data for the second year only now the accumulated depreciation is equal to $190,250. The answer to our question is $95,125 of depreciation expense.
If the asset was placed in service in the middle of the year, you would need to adjust how much depreciation to record for the first year accordingly. For example, if the equipment was used only starting from August 1st, then we would multiply the $190,250 by 5/12 (months) to get $79,271. When calculating depreciation expense for the next year, we will now use $79,271 accumulated depreciation amount instead of $190,250.
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Author: Charles Lutwidge