Understanding the Double Declining Balance Method: A Guide to Accelerated Depreciation

If you own a business or want to start one, you might need to buy things like computers, machines, or furniture. These things are called “assets.” Over time, assets become older or used, and they lose some of their value. This is called depreciation. There are many other ways to find out how much the asset loss is per year. One of the faster ways is called the Double Declining Balance Method. This method is just a way to show that some things lose value faster in the beginning and slower later on.

In this guide, we’ll understand the Double Declining Balance Method in easy steps. By which you can understand the double declining depreciation formula clearly.

What is Depreciation?

Something that loses value over time is Depreciation. Imagine you buy a car for your business.  It is worth a lot when it’s brand new. But after a few years, the car gets older, the parts wear out, and newer cars come out. So, the car isn’t worth as much anymore. That drop in value each year is called depreciation.

Businesses use depreciation to show how much value something like a machine, car, or computer loses each year. This helps them keep track of their money better and also helps when it’s time to do taxes. It shows how much the item is still worth and how much it has been used.

What is the Double Declining Balance Method?

The Double Declining Balance Method (also called the double declining method) is one way to calculate depreciation. This method shows that an item loses more value in the first few years. Along with them loses less value later on. It’s different from other methods because it uses double the rate of the simple method, called the straight-line method.

This method is really helpful for things that lose value fast, like computers, phones, or vehicles. These items work best when they are new, so they lose value quickly. The double declining method helps businesses show this in their records and helps them save more on taxes early on.

The Double Declining Depreciation Formula

To find the depreciation amount each year, the formula is:

Depreciation = 2 × (Straight-Line Rate) × (Book Value at Beginning of Year)

Let’s break that down:

• Straight-Line Rate = 100% divided by the number of years the asset will be used.
• Book Value = How much the asset is worth at the beginning of the year (after subtracting any depreciation from earlier years).

Step-by-Step Way to Calculate Depreciation Using the Double Declining Method

The double declining balance method is a way to find out how much value an asset (like a car, machine, or computer) loses each year. This method makes the asset lose value faster in the beginning years.

Here are the easy steps to follow:

Step 1: Know the Starting Cost

Write down how much the asset cost when you bought it. This is called the initial cost.

Step 2: Find the Salvage Value

The salvage value is how much money the asset will be worth at the end of its useful life. This is the value you might get if you sell or throw it away after using it for many years.

Step 3: Know How Long You’ll Use It

Figure out how many years the asset will be useful. This is called its useful life.

Step 4: Calculate the Depreciation Rate

Use this simple formula:

Depreciation Rate = 1 ÷ Useful Life

Then, double this rate because we are using the double declining method.

Step 5: Multiply to Find Depreciation

At the start of each year, take the book value (how much the asset is worth right now) and multiply it by 2 × the depreciation rate.

This tells you how much value the asset is losing that year. This is your depreciation expense.

 Step 6: Find the New Value

Now, subtract the depreciation from the book value. 

Step 7: Repeat Every Year

Do the same steps every year. Keep going until the value of the asset is close to the salvage value. Don’t go below the salvage value.

Pros of the Double Declining Balance Method 

1. Tax Savings Early
   You pay less tax in the first few years because you can subtract more money as an expense.
   
2. Better Matching
   It matches how the asset is used. For example, some machines work harder when they are new, so they lose value faster.
   
3. Great for Fast-Depreciating Assets
   This method is good for things that lose value quickly, like cars, computers, and phones.
   
4. Faster Expense Recording
   You show the loss in value faster, which helps if your business needs quick results.
   
5. Helps with Cash Flow
   Since you pay less tax early on, you save money that can help your business grow.
   
6. Simple to Use with a Chart or Software
   Even though you do it yearly, many tools can help you calculate easily.

Cons of the Double Declining Method 

1. More Work Each Year
   You have to recalculate the numbers every year. It takes more time than straight-line depreciation.

    

2. Not Good for All Assets
   This method doesn’t work well for things that lose value slowly, like furniture or buildings.

    

3. Smaller Depreciation Later
   In the later years, the amount you can subtract becomes very small.

    

4. Can Be Confusing
   If you’re new to accounting, this method may seem a bit tricky to understand at first.

    

5. Might Show Lower Profits Later
   Because the expenses are bigger at the start, your profits might look smaller at first even if your business is doing well.

    

6. Not Always Accepted
   Some rules or countries might prefer a different method. 

The double declining balance method is a smart way to show how things lose value quickly over time. It helps businesses save money on taxes in the early years. This method is great for items like machines, cars, or computers that lose value fast. It also shows how much the item is used each year, which is fair and helpful.

To use this method, remember to use the double declining depreciation formula and update your numbers every year. If you’re not sure how to do it, it’s okay to ask a bookkeeper or an accountant for help.

Meru Accounting has expertise in bookkeeping and can help you use the double declining method the right way so your business runs smoothly.

FAQs

1. Why would someone use this method?
   People use it because it helps them save money on taxes early and matches how some things wear out faster when they’re new.
2. Can I use it for all kinds of things?
   No. It’s best for things like electronics, vehicles, or machines that lose value quickly. It’s not great for things that last a long time, like buildings.
3. Is it hard to calculate?
   It can be a little tricky, but you just need to follow steps and use the formula. Some calculators or computer programs can help too.

4. Does this method ever stop?
   Yes. You stop when the value of the item reaches its salvage value  that’s the leftover worth after it’s been used for many years.