What Is the Double Declining Balance Depreciation Method?

Double declining balance (DDB) depreciation is an accelerated depreciation method that expenses depreciation at double the normal rate. Learn how to calculate DDB here.

Depreciation is used to allocate the cost of a fixed or intangible asset over its useful life. Any time you purchase a large ticket item for your business, it should be depreciated, rather than expensed immediately. There are four frequently used depreciation methods to depreciate assets:

• Straight line depreciation
• Double declining depreciation
• Sum-of-the-years’ digits depreciation
• Units of production depreciation (only used for machinery)

Instead of a recurring depreciation expense for the life of the asset, the double declining depreciation method accelerates the depreciation process by doubling the depreciation expense earlier in the life of the asset, with expenses declining as the asset gets older.

While some accounting software applications have fixed asset and depreciation management capability, you’ll likely have to manually record a depreciation journal entry into your software application.

Depreciation journal entries are considered an adjusting entry that should be recorded in your general ledger before running an adjusted trial balance.

Whether you are using accounting software, a manual general ledger system, or spreadsheet software, the depreciation entry should be entered prior to closing the accounting period.

What is the double declining balance (DDB) depreciation method?

Double declining balance (DDB) depreciation is an accelerated depreciation method. DDB depreciates the asset value at twice the rate of straight line depreciation.

Unlike straight line depreciation, which stays consistent throughout the useful life of the asset, double declining balance depreciation is high the first year, and decreases each subsequent year.

When to use the double declining balance depreciation method

The best reason to use double declining balance depreciation is when you purchase assets that depreciate faster in the early years. A vehicle is a perfect example of an asset that loses value quickly in the first years of ownership.

It’s important to note that double declining balance depreciation is not permitted by the IRS, but they do allow Modified Accelerated Cost Recovery System (MACRS), which also allows you to take a larger deduction in the early years of the asset.

What is the double declining depreciation rate?

The double declining balance depreciation rate is twice what straight line depreciation is. For example, if you depreciate your machine using straight line depreciation, your depreciation would remain the same each month.

However, using the double declining depreciation method, your depreciation would be double that of straight line depreciation.

While you don’t calculate salvage value up front when calculating the double declining depreciation rate, you will need to know what it is, since assets are depreciated until they reach their salvage value.

For example, you purchase a piece of machinery for your factory that costs $100,000, with a salvage value of $8,000, and a useful life of five years. To obtain your rate of depreciation, you would use the following depreciation formula:

1/5 x 100 = 20%

That means that your straight line depreciation rate is 20%. Knowing the straight line depreciation rate is important because you’ll need to double it to calculate double declining depreciation:

2 x 20% = 40%

This means that your depreciation rate for double declining depreciation is 40%, making your first year depreciation $40,000. You’ll depreciate the asset until the book value reaches $8,000.

Below is a depreciation table using straight line depreciation. Remember, in straight line depreciation, salvage value is subtracted from the original cost. If there was no salvage value, the beginning book balance value would be $100,000, with $20,000 depreciated yearly.

Straight line depreciation expense remains the same every year.

The next chart displays the differences between straight line and double declining balance depreciation, with the first two years of depreciation significantly higher.

Double declining balance depreciation is higher in the early years, then decreases over time.

Even though year five’s total depreciation should have been $5,184, only $4,960 could be depreciated before reaching the salvage value of the asset, which is $8,000.

How to calculate depreciation using the double declining method

To calculate depreciation using the double declining method, you’ll first need to determine:

• The cost basis: The cost basis is the total cost of the asset, including any associated taxes, shipping and handling, installation costs, and any other costs associated with the asset.
• The useful life of the asset: To calculate depreciation, you will need to determine the useful life of the asset. This is how long you expect the asset to last before it will be disposed of or sold.
• The book value of the asset: You will need to know the book value of the asset to accurately calculate DDB depreciation.

For example, you purchase a truck for your delivery service. The cost of the truck including taxes, title, license, and delivery is $28,000. Because of the high number of miles you expect to put on the truck, you estimate its useful life at five years.

At the end of those five years, you expect the salvage value of the truck to be $3,500. With this information in hand, you’re now ready to calculate depreciation for your truck using the double declining balance formula:

2 x (1/5) x $28,000 = $11,200

Your first year’s depreciation would be $11,200.

To calculate your DDB for year two, you’ll need to use your current book value. The book value for the truck for year two would be $16,800. This is the amount you’ll use to calculate your second year of depreciation. Your second year calculation would be:

2 x (1/5) x $16,800 = $6,720

With your second year of depreciation totaling $6,720, that leaves a book value of $10,080, which will be used when calculating your third year of depreciation. The following table illustrates double declining depreciation totals for the truck.

Double declining balance depreciation per year with book value included.

Notice in year 5, the truck is only depreciated by $129 because you’ve reached the salvage value of the truck.

FAQs

• Why should I use double declining balance depreciation?

  Double declining balance depreciation (DDB) is a good depreciation option when you purchase an asset that loses more value in its early years. Vehicles are a good candidate for using double declining balance depreciation.

• Is there a downside to using DDB depreciation?

  There are a couple. First, the IRS does not permit the use of double declining balance depreciation for tax purposes, but it does allow MACRS, which is similar to DDB.

  The other downside can be a reduction in net income due to the increased depreciation expense. You or your accounting staff should check with a CPA if you have questions about using double declining balance depreciation.

• Is double declining balance depreciation easy to calculate?

  Following the formula makes the calculation fairly straightforward, but unlike straight line depreciation, which remains consistent throughout the useful life of the asset, you’ll calculate depreciation each year based on the book value of the asset at the beginning of the year.

• Is double declining balance depreciation right for you?

  Double declining balance (DDB) depreciation is an accelerated depreciation method that can depreciate assets that lose value quickly.

  Though more time-consuming than straight line depreciation to calculate, double declining balance depreciation lowers your net income, and thus your tax payments during the first few years of the life of the asset.

  Like all depreciation methods, double declining balance depreciation impacts both your balance sheet and your income statement, so if you or your accounting staff are unsure about whether to use this accelerated depreciation method, or how to calculate depreciation properly, check with an accountant or CPA.