Starting off, your book value will be the cost of the asset—what you paid for the asset. (You can multiply it by 100 to see it as a percentage.) This is also called the straight line depreciation rate—the https://www.bookstime.com/articles/back-office-accounting percentage of an asset you depreciate each year if you use the straight line method. There are various alternative methods that can be used for calculating a company’s annual depreciation expense.

Double declining balance is sometimes also called the accelerated depreciation method. Businesses use accelerated methods when having assets that are more productive in their early years such as vehicles or other assets that lose their value quickly. While the straight-line method reduces profit by the same amount each accounting period, the other two methods cause a company’s profit to fluctuate with all else being equal. double declining balance method The double-declining-balance method causes lower profit in the earlier years of an asset’s life than in the later years due to the greater depreciation expense in the earlier years. Units-of-production may cause unpredictable profit swings based on the amount of output an asset generates. Accrual-based accounting requires a business to match the expenses it incurs with the revenues it generates each accounting period.

Which Depreciation Method Should I Use?

While the straight-line method is the most common, there are also many cases where accelerated methods are preferable, or where the method should be tied to usage, such as units of production. Consider a widget manufacturer that purchases a $200,000 packaging machine with an estimated salvage value of $25,000 and a useful life of five years. Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment.

• 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.
• This process is repeated each year until the asset’s book value reaches zero or the asset is no longer in use.
• US GAAP and IFRS allow the double declining balance method to be a valid depreciation method for fixed assets.
• This rate is applied to the asset’s remaining book value at the beginning of each year.
• Starting off, your book value will be the cost of the asset—what you paid for the asset.
• Below we will describe each method and provide the formula used to calculate the periodic depreciation expense.

Compared to other depreciation methods, double-declining-balance depreciation results in a larger amount expensed in the earlier years as opposed to the later years of an asset’s useful life. With the double-declining-balance method, the depreciation factor is 2x that of the straight-line expense method. The double declining balance (DDB) depreciation method is an approach to accounting that involves depreciating certain assets at twice the rate outlined under straight-line depreciation. This results in depreciation being the highest in the first year of ownership and declining over time. Take, for example, any new or existing equipment that you have in your plant. Your CMMS can track an asset’s value and anticipate depreciation over its useful life.

Advantages of the Declining Balance Method

Extensions allow extra time to file a tax return, but it does not give you extra time to pay. As a business owner, you have many options for paying yourself, but each comes with tax implications. Next year when you do your calculations, the book value of the ice cream truck will be $18,000. Don’t worry—these formulas are a lot easier to understand with a step-by-step example. The RL / SYD number is multiplied by the depreciating base to determine the expense for that year. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.