# How to Calculate Double Declining Depreciation

Two Parts:Deciding Whether to Use Double Declining DepreciationCalculating Double Declining Depreciation

Depreciation is an essential part of business accounting. Recording regular depreciation expenses over the life of an asset reflects a very real principle: that assets will be worth less over time.^{[1]} While the common straight-line method of recording depreciation is simplest, an accelerated model tends to reflect the value of the asset more realistically. The most aggressive of all accelerated depreciation models is called the double declining balance method. Fortunately, it is easy to learn how to calculate double declining depreciation.

## Steps

### Part 1 Deciding Whether to Use Double Declining Depreciation

- 1
**Know when to use depreciation.**Before you decide on which depreciation method to use, you'll want to be sure that you need to use depreciation at all. In accounting, expenses are recorded for the same period in which revenues are produced from those expenses. Therefore, if you purchase an expensive asset that you will use for multiple accounting periods (usually years), you will want to spread the cost of that asset out over the years in which it produces revenue. This expense is recorded each year as depreciation.^{[2]} - 2
**Familiarize yourself with what double declining depreciation is.**This depreciation model is an alternative to the commonly-used straight-line method, in which an asset's value is marked down by the same amount each year until it is scrapped.^{[3]}In contrast, the double declining method accelerates this process, expensing a large portion of the asset's cost in the first year, and expensing progressively smaller amounts each year.^{[4]} - 3
**Understand when you should implement double declining depreciation.**The accounting profession allows for some discretion here, but generally an accelerated depreciation model should only be implemented when it is felt that this model best reflects the actual value of the asset. Generally, this method should be used with rapidly depreciating assets.^{[5]}- As an example, imagine you just purchased a new car. If you drive the car for 1 year, would you expect to be able to sell it for anywhere near the original purchase price? Most likely, the car would have lost a considerable amount of value solely on the basis of no longer being new.
- Accordingly, how different do you think the price might be if you sold the car after 8 years versus selling after 9 years? The price would probably not drop much during this year. So, the car lost more value in year 1 than in year 9. Thus, an accelerated depreciation model would be appropriate.
- Additionally, it may be beneficial for a business to use this method as a way to recognize more expense now and greater profit in the future, thus also deferring income taxes until more profit is earned.
^{[6]}

### Part 2 Calculating Double Declining Depreciation

- 1
**Know the formula.**The double declining depreciation formula is defined quite simply as two times the straight-line depreciation rate multiplied by the book value of the asset at the beginning of the period. Bear in mind that the book value is simply the original cost of the asset minus any accumulated depreciation. That is, the book value used will decrease over time as the value of the asset decreases and accumulates more depreciation.^{[7]} - 2
**Determine the annual depreciation rate.**Start with a basic straight-line depreciation rate. This requires spreading the value of the asset out equally over a chosen number of years. For example, if an asset purchased by your company has a useful life of 5 years, the straight-line annual depreciation percentage would allocate the total cost over five years, or 20% per year. Double declining depreciation doubles that rate, so the rate you will use is twice that, at 40%.- Note that while the asset's salvage value is used to calculate straight line depreciation, it is not used when figuring this rate.
^{[8]}

- Note that while the asset's salvage value is used to calculate straight line depreciation, it is not used when figuring this rate.
- 3
**Calculate the yearly depreciation expense.**Each year, multiply the asset's book value at the beginning of the year by the depreciation rate to determine the depreciation expense. Then, subtract this expense from the starting book value to get the ending book value. This ending value will then be used as the starting value for the next accounting period.^{[9]}- Continuing with the example above, assume that the asset purchased by your company costs $2,000 (and has a useful life of 5 years). The depreciation expense for the first year is 40% of $2,000, or $800. So, the asset's book value at the end of year 1 will be $2,000 minus $800, or $1,200.
- In year 2, the depreciation expense is 40% of $1,200 (the current book value), or $480. So, the asset's book value at the end of year 2 will be $1,200 minus $480, or $720. This process continues until the asset reaches its salvage value.
^{[10]}

- 4
**Make sure the asset's book value does not fall below its salvage value.**Though the double declining balance method may dictate that an expense should be made that would push the asset's book value below its projected salvage value, this is not acceptable. When this happens, the correct expense amount is the amount that makes the asset's book value the same as its salvage value.^{[11]}- Imagine that the salvage value of your $2,000 asset is $300. In year 4, your starting book value for your asset would be $432. If you carried through with double declining depreciation as before, you would calculate 40% of $432 as $172.80. However, subtracting this amount from the book value would result in a value lower than the salvage value of $300.
- To remedy this issue, you would simply expense the amount that it takes to get the asset's book value down to the salvage value of $300. In this case, that would be $432 minus $300, or $132.
- Salvage value is defined as the value that an asset can be sold or scrapped for at the end of its useful life. It is generally a best guess or in some cases can be determined by a tax regulatory body like the Internal Revenue Service (IRS).
^{[12]}

- 5
**Consider combining the double declining method with another method.**Because this method does not always depreciate an asset fully by the end of its useful life, it is a common practice to also compute depreciation expenses using the straight-line method and apply the greater of the two. In effect, the asset would be depreciated using the double declining balance method for half its life, and the straight-line method for the other half.^{[13]}- In the example this switch would occur in the third account period. The depreciation expense using double declining depreciation would be 40% of the starting book value at $720, or $288. This would be less than the expense calculated using straight-line depreciation, which would just be 20% of the original value of $2,000, or $400.

## Tips

- An accelerated depreciation model that is not quite as aggressive as the double declining balance method is the sum-of-years' digits method. This method will fully depreciate an asset over its useful life and is applicable for cars that hold value well or other assets that don't depreciate fast enough to use the double declining method.
^{[14]} - Another form of this method, the 150% declining balance method, simply multiplies the straight line depreciation rate by 1.5, rather than by 2. This slows down the depreciation rate slightly.
^{[15]} - Note that these calculations will work equally well in other currencies.

## Sources and Citations

- ↑ http://www.investopedia.com/terms/d/depreciation.asp
- ↑ http://www.investopedia.com/terms/d/double-declining-balance-depreciation-method.asp
- ↑ http://www.investopedia.com/terms/s/straightlinebasis.asp
- ↑ http://www.investopedia.com/terms/d/double-declining-balance-depreciation-method.asp
- ↑ http://www.accountingtools.com/double-declining-balance-depre
- ↑ http://www.accountingtools.com/double-declining-balance-depre
- ↑ http://academic.regis.edu/dbush/accounting/accounting%20help/Depreciation/acc_dd_depreciation.htm
- ↑ http://ccba.jsu.edu/accounting/DEPRECIATION.HTML
- ↑ http://www.investopedia.com/terms/d/double-declining-balance-depreciation-method.asp
- ↑ http://academic.regis.edu/dbush/accounting/accounting%20help/Depreciation/acc_dd_depreciation.htm
- ↑ http://academic.regis.edu/dbush/accounting/accounting%20help/Depreciation/acc_dd_depreciation.htm
- ↑ http://www.investopedia.com/terms/s/salvagevalue.asp
- ↑ http://ccba.jsu.edu/accounting/DEPRECIATION.HTML
- ↑ http://www.investopedia.com/terms/s/sum-of-the-years-digits.asp
- ↑ http://www.accountingtools.com/double-declining-balance-depre

## Article Info

Categories: Accounting and Regulations