Double Declining Depreciation: Definition
Double-declining depreciation, defined as an accelerated method of depreciation, is a GAAP approved method for discounting the value of equipment as it ages. It depreciates a tangible asset using twice the straight-line depreciation rate.
Double Declining Depreciation: Explanation
Double declining depreciation, explained as one of the most common methods to depreciate tools, is everywhere. The idea is that the asset’s value declines more steeply in the early years of usage. The result is that the depreciation expenses are larger in beginning and then get smaller over time.
Companies often use this method of depreciation for tax purposes. Because the depreciation expenses are larger in the early periods of the asset’s useful life, the
savings are greater in the beginning of the depreciation cycle and the tax benefits come sooner.
Double-Declining Balance Method: Schedule
When using double-declining balance method schedule, the depreciation rate stays the same, the depreciation expense gets smaller each period, and the depreciable base gets smaller each period.
Begin with the depreciable base, and then calculate the depreciation expense for the period. Subtract that depreciation expense from the depreciable base to get the depreciable base for the next period. Repeat this process until you reach the salvage value. If the final depreciation expense would bring the asset value below salvage value, then simply subtract salvage value from that period’s depreciable base to get the final depreciation expense.
For example, if you have an asset with a purchase price of $1,000, a salvage value of $100, and a useful life of 5 years, then the straight-line depreciation rate will be 20%. The double-declining depreciation rate would then be 40%. The double declining depreciation table for the asset would look like this:
Year Depreciable Base Depreciation Rate Depreciation Expense 1 $1,000 40% $400 2 $600 40% $240 3 $360 40% $144 4 $216 40% $86.40 5 $129.60 - $29.60
Double Declining Depreciation: Example
Brian is an accountant for small businesses. A trained CPA, Brian uses his skills to make sure each of his client businesses receives the financial management it needs.
He is approached by a customer who needs to depreciate his equipment. Brian naturally turns to double declining depreciation, GAAP compliance, simple application, and other benefits of this method make it a perfect fit for this job. Brian then collects information and performs the calculation below:
Purchase price is $1,000; Salvage value is $100; and useful life is 5 years
Depreciable Base = $1,000 – $100 = $900
Depreciation Expense = $900 / 5 = 180
Double Declining Depreciation Rate = $180 / $900 = 20%
Brian finds that the double declining depreciation method, here, yields a rate of 20%. He then creates the schedule above. This allows a clear understanding of how each depreciation expense relates to time.
Brian knows the value of financial management. Where many potential clients have failed, he has led many of his customers to success through this alone. He values the double declining depreciation schedule he has created here because it may create the same effect for this client.