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4 Min. Read

A Guide to Double Declining Balance Depreciation Method

A Guide to Double Declining Balance Depreciation Method

As business assets age, they tend to lose their value. The original cost of the item is still relevant, but over time they don’t maintain that original value. This is a concept known as depreciation. When you’re doing your business’s accounting, depreciation is a concept that you need to be familiar with.

There are two major depreciation methods used when accounting. One of them is the double declining balance depreciation method. Keep reading to learn all you know about this method of depreciation!

Here’s What We’ll Cover:

Understanding the Common Methods of Depreciation

Key Takeaways

Understanding the Common Methods of Depreciation

When you talk to a financial professional about depreciation, they’re going to recommend one of two methods. The two methods are the double declining method, and the straight line depreciation method. We’re covering the double declining method in this article.

Double declining balance depreciation is an accelerated depreciation calculation in business accounting. At its accelerated rate, it has a rate of depreciation double that of the standard declining method. This is where it got its name.

When Should the Double Declining Balance Method be Used?

Businesses use the double declining balance method when an asset loses its value quickly. This method, like other accelerated depreciation methods, counts depreciation expenses faster. In basic terms, this means that the depreciation schedule sees larger losses in a shorter period of time. When comparing an early accounting period to a later one, the double declining method has higher expenses earlier in the asset’s life.

How is the Double Declining Depreciation Calculated?

When you’re trying to calculate the double declining rate, you can refer to a specific formula. Check out the double declining balance formula below:

The Double Declining Balance Depreciation Formula

Depreciation Rate = 2 x Straight Line Depreciation Rate Percent x Book Value*

*It should be noted that the Book Value represents what it was at the beginning of the accounting period.

The double declining method seeks to accelerate the rate of the straight line rate. As such, there are several factors that do this. First, the rate is doubled, because the double declining method is being used. Also, the straight line rate being used is increased, as well. The percentage of the straight-line depreciation can be anywhere from 150 to 250 percent of what it normally is.

When you choose to use the double declining method, the rate of depreciation has to be maintained for the asset’s life. The rate is set after the first depreciation period, and is applied to the declining book value each period that follows.

Why are Depreciation Expenses Necessary?

You might be confused about why the purchase of an expensive asset isn’t considered an outright expense. This is because of the generally accepted accounting principles, or GAAP. GAAP states that when an asset is to be used for many years, the purchase needs to be deducted over time.

This is why depreciation methods are important. Because these cannot be considered an immediate expense, they have to be accounted for over time. Many of the best accounting software options can help you with this, thankfully.

Choosing Between a Standard Rate and an Accelerated Rate

A big part of being a business owner is understanding the assets and expenses your business has. Most businesses, no matter the size, have assets that will lose their value over time. When you purchase these assets, you’ll have to choose your method of depreciation.

One asset that many business owners have is a vehicle. Cars and trucks are notorious for losing their value quickly. They tend to lose about a third of their value following their initial purchase, and the value falls from there. As such, you may want to account for this loss in value by using an accelerated depreciation rate.

As you use the car or truck, it accumulates wear and tear, as well as mileage. The useful life of a car isn’t very long, especially when being used for business purposes. In this case, you’d want to use an accelerated method of depreciation.

Key Takeaways

When you run a business, you have to be aware of the useful life of your assets. Some assets have lives that last for decades, while others can only be counted on for a few years. Depending on the asset, you may want to consider using the double declining balance depreciation method. This method accounts for assets that lose their value quickly.

If you’re looking for more accounting know-how, be sure to visit our resource hub! We have plenty of helpful information for business owners and industry enthusiasts alike!