Double Declining Balance Depreciation Method
Definition of 'Double Declining Balance Depreciation Method'
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*straight line depreciation percent*[(book value at beginning of period-salvage value)-accumulated depreciation)].
Investopedia explains '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 a portion of the price in each of 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 $27,000 in year 1 ($5,400), 20% of $21,600 ($27,000 minus $5,400) in year 2 ($4,320), 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 certain assets that lose value quickly.