What Is the Double Declining Balance (DDB) Depreciation Method?
The double declining balance depreciation (DDB) method, also known as the reducing balance 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 as an expense more rapidly when compared to straight-line depreciation that uses the same amount of depreciation each year over an asset's useful life. Similarly, compared to the standard declining balance method, the double declining method depreciates assets twice as quickly.
- The double declining balance (DDB) method is an accelerated depreciation calculation used in business accounting.
- Specifically the DDB method depreciates assets twice as fast as the traditional declining balance method.
- The DDB method records larger depreciation expenses during the earlier years of an asset’s useful life, and smaller ones in later years.
- As a result, companies opt for the DDB method for assets that are likely to lose most of their value early on, or which will become obsolete more quickly.
Double Declining Balance Depreciation Method
DDB Depreciation Formula
Depreciation=2×SLDP×BVwhere:SLDP = Straight-line depreciation percentBV = Book value at the beginning of the period
The Basics of DDB Depreciation
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 does not deduct the entire purchase price as a business expense in the year of purchase but instead deducts the price over several years.
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.
Example of DDB Depreciation
As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. After 10 years, it would be worth $3,000, its salvage value. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years – that is, $30,000 minus $3,000, divided by 10.
Using the double declining balance method, however, it would deduct 20% of $30,000 ($6,000) in year one, 20% of $24,000 ($4,800) in year two ($4,800), and so on.
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 it uses a depreciation rate that is some multiple of the straight-line method rate.
Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of 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, or depreciation base, of an asset declines over time. With the constant double depreciation rate and a successively lower depreciation base, charges calculated with this method continually drop. 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 may have to be limited to a lesser amount to keep the salvage value as estimated.