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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. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability https://www.bookstime.com/ in the first few years after purchasing them. As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 yearsâ€“that is, $30,000 minus $3,000, divided by 10.

This method takes most of the depreciation charges upfront, in the early years, lowering profits on the income statement sooner rather than later. However, it’s not as easy to calculate, and you must refigure your depreciation expense each period. In year 5, companies often switch to straight-line depreciation and debit Depreciation Expense and credit Accumulated Depreciation for $6,827 ($40,960/6 years) in each of the six remaining years. Therefore, the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4.

## Step four

Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the assetâ€™s utility is consumed at a more rapid rate during the earlier phases of its useful life. Depreciation is an accounting process by which a company allocates an asset’s cost throughout its useful life. In other words, it records how the value of an asset declines over time. Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time.

- Download the free Excel double declining balance template to play with the numbers and calculate double declining balance depreciation expense on your own!
- For example, if you depreciate your machine using straight line depreciation, your depreciation would remain the same each month.
- Of course, the pace at which the depreciation expense is recognized under accelerated depreciation methods declines over time.
- It does not take salvage value into consideration until you reach the final depreciation period.
- We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
- The accounting concept behind depreciation is that an asset produces revenue over an estimated number of years; therefore, the cost of the asset should be deducted over those same estimated years.

In the final period, the depreciation expense is simply the difference between the salvage value and the book value. At the beginning of the first year, the fixture’s book value is $100,000 since the fixtures have not yet had any depreciation. Therefore, under the https://www.bookstime.com/articles/double-declining-balance-method the $100,000 of book value will be multiplied by 20% and will result in $20,000 of depreciation for Year 1. The journal entry will be a debit of $20,000 to Depreciation Expense and a credit of $20,000 to Accumulated Depreciation. An asset for a business cost $1,750,000, will have a life of 10 years and the salvage value at the end of 10 years will be $10,000. You calculate 200% of the straight-line depreciation, or a factor of 2, and multiply that value by the book value at the beginning of the period to find the depreciation expense for that period.

## Disadvantages of Double Declining Balance Method

The final step before our depreciation schedule under the double declining balance method is complete is to subtract our ending balance from the beginning balance to determine the final period depreciation expense. Aside from DDB, sum-of-the-years digits and MACRS are other examples of accelerated depreciation methods. They also report higher depreciation in earlier years and lower depreciation in later years.

### What is the formula for double declining balance method in Excel?

The syntax for the variable-declining balance method of depreciation in Excel is =VDB(cost, salvage, life, start_period, end_period, [factor], [no_switch]). The first five arguments are required, and the last two are optional.