Double Declining Balance Depreciation Method

As you can see, the depreciation rate is multiplied by the asset book value every year to compute the deprecation expense. The expense is then added to the accumulated depreciation account.

Note that in Year 7, the depreciation expense is capped at $2,429 to prevent the book value of the generator from falling below the scrap value of the asset ($50,000). With this method, the depreciation is expressed by the total number of units produced vs. the total number of units that the asset can produce. Conceptually, depreciation is the reduction in the value of an asset over time due to elements such as wear and tear. Accounting How To Avoid Tax Penalties – A Simple Guide Are you a small business owner trying to figure out how you can avoid tax penalties? However, you should be aware of the method your company uses to maintain its books of accounts. It’s always best to have a rationale for why you’re using a particular method and the purpose the method serves for your new business. Once you fully depreciate the asset’s value, you have to record the salvage value of the asset and close the account.

What is Depreciation?

The higher depreciation in earlier years matches the fixed asset’s ability to perform at optimum efficiency, while lower depreciation in later years matches higher maintenance costs. However, computing the double declining depreciation is very systematic. It’s ideal to have an accounting software program that can calculate depreciation automatically. Declining balance method is considered an accelerated depreciation method because it depreciates assets at higher double declining balance method rates in the beginning years and lower rates in the later years. The double-declining balance depreciation 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. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly. The double declining balance method is an accelerated depreciation method.

Depreciation is a critical aspect when it comes to recording assets in the books of accounts. As a small business owner, you should hire an accountant who can help you with the complexities involved with depreciation. This will relieve the burden of handling such a challenging task yourself. The straight-line method of depreciating assets is the most common and widely used due to its ease of calculation. The depreciation value or the amount remains the same every year. However, this concept is scientifically flawed as no asset can depreciate at the same rate every year. Lastly, under this method of depreciation accounting, the value of the asset never gets zero.

Step 2. Straight Line Depreciation Rate Calculation

Since it always charges a percentage on the base value, there will always be leftovers. If you’re brand new to the concept, open another tab and check out our complete guide to depreciation. Then come back here—you’ll have the background knowledge you need to learn about double declining balance. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date.

You can use several methods to calculate the annual depreciation value of a specific asset. The importance of the double-declining method of depreciation can be explained through the following scenarios. Sometimes, when the company is looking to defer the tax liabilities and reduce profitability in the initial years of the asset’s useful life, it is the best option for charging depreciation. We can understand how the depreciation expense is calculated each year under the double-declining method from the below schedule. For example, last year, the actual depreciation expense as per the depreciation rate should have been $13,422 but kept at $12,108.86 to keep the asset at its estimated salvage value.

Straight-Line Depreciation Method

It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. Depreciation ExpenseDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.

The next year, they calculate remaining depreciable balance, divide by remaining years and multiply by two. They do this each year until the final year of the asset’s useful life, where they depreciate any remainder over the asset’s salvage value. Then, we need to calculate the depreciation rate, which is explained under the next heading. In the next step, we need to multiply the beginning book value by twice the depreciation rate and deduct the depreciation expense from the beginning value to arrive at the remaining value. A similar process will be repeated each year throughout the asset’s useful life, or till the point we reach the salvage value of the asset. With the double declining balance method, you depreciate less and less of an asset’s value over time.

Which translates to depreciation of $400 per year for the company’s van. If you have a side job, be sure to pay your income tax throughout the year. You’ll need to pay taxes directly to the IRS via quarterly estimated tax payments. At the beginning of Year 4, the asset’s book value will be $51,200. Therefore, https://www.bookstime.com/ the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4. Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business. He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines.

• However, this concept is scientifically flawed as no asset can depreciate at the same rate every year.
• It was first enacted and authorized under the Internal Revenue Code in 1954, and it was a major change from existing policy.
• Our ending book value is the beginning book value less depreciation expense.
• Finally apply a 20% depreciation rate to the carrying value of the asset at the beginning of each year.