What is the 'Double Declining Balance Depreciation Method'
The double declining balance depreciation method is one of two common methods a business uses to account for the expense of a long-lived asset. The double declining balance depreciation method is an accelerated depreciation method that counts twice as much of the asset’s book value each year as an expense compared to straight-line depreciation. The formula is:
Depreciation for a period = 2 x straight-line depreciation percent x book value at beginning of period.
BREAKING DOWN 'Double Declining Balance Depreciation Method'
Under the generally accepted accounting principles (GAAP) for public companies, expenses are recorded in the same period as the revenue that is earned as a result of those expenses. Thus, when a company purchases an expensive asset that will be used for many years, it doesn’t deduct the entire purchase price as a business expense in the year of purchase but instead deducts the price over several years.
For example, if a business purchased a delivery truck for $30,000 that it expected to last for 10 years, after which it would be worth $3,000 (its salvage value), the company would deduct the remaining $27,000 as $2,700 per year for 10 years under straight-line depreciation. Using the double declining balance method, however, it would deduct 20% (double 10%) of $30,000 in year one ($6,000), 20% of $24,000 ($30,000 minus $6,000) in year two ($4,800), and so on.
Because the double declining balance method results in larger depreciation expenses near the beginning of an asset’s life and smaller depreciation expenses later on, it makes sense to use this method with assets that lose value quickly.
Double Depreciation Rate
The double declining balance method is a type of declining balance method with a double depreciation rate. The declining balance method is one of the two accelerated depreciation methods and uses a depreciation rate that is some multiple of that for the straight-line method. Depreciation rates used in the declining balance method could be as 200% (double), 150% or 250% the straight-line rate. When the depreciation rate for the declining balance method is set as a multiple doubling the straight-line rate, the declining balance method is effectively the double declining balance method. Over the depreciation process, the double depreciation rate remains constant and is applied to the reducing book value each depreciation period.
Declining Book Value Balance
The book value of a depreciable asset at the beginning of each depreciation period is determined based on the asset's book value at the beginning of the prior period, minus the depreciation charge for the prior period. As a result, the book value or depreciation base declines over time. With the constant double depreciation rate and a successively lower depreciation base, depreciation charges using the double declining balance method decline each depreciation period. The balance of the book value is eventually reduced to the asset's salvage value after the last depreciation period. However, the final depreciation charge as calculated may have to be limited to a lesser amount to keep the salvage value as estimated.