How to Calculate Depreciation Using Double Declining Method

Depreciation is an accounting process that systematically allocates the cost of a tangible asset over its useful life. It spreads the cost of a large asset over its useful life, matching expenses with revenue and providing a more accurate financial picture. Among various depreciation methods, the double-declining balance method is an accelerated approach, recording a larger portion of an asset’s depreciation in its earlier years. This method is often favored for assets that lose value more quickly or are more productive in their initial years.

Understanding the Key Components

Accurate depreciation calculations, particularly with the double-declining balance method, rely on understanding specific asset characteristics. Asset cost includes the purchase price and all expenditures necessary to acquire and prepare the asset for its intended use, such as shipping, installation, and initial setup.

Salvage value, or residual value, is the estimated amount a company expects to receive from selling or disposing of an asset at the end of its useful life. An asset cannot be depreciated below this estimated value. Some assets, especially those that become obsolete quickly, might have a salvage value of zero.

Useful life refers to the estimated period, typically in years, an asset provides economic benefits to the business. This estimate reflects how long the asset will be used, not its physical lifespan. Factors like expected wear and tear, technological obsolescence, and legal limits influence useful life.

Determining the Depreciation Rate

The depreciation rate for the double-declining balance method is based on the straight-line depreciation rate. The straight-line method spreads an asset’s cost evenly over its useful life. Its annual depreciation rate is determined by dividing one by the asset’s useful life in years. For example, an asset with a 5-year useful life has a straight-line rate of 1/5, or 20% per year.

The double-declining balance method accelerates this rate by using twice the straight-line rate. The formula is (1 / Useful Life) 2. For a 5-year useful life, the straight-line rate is 20%, resulting in a double-declining balance rate of 40%. This higher rate is applied to the asset’s book value each year.

Applying the Double Declining Balance Method

Applying the double-declining balance method involves a year-by-year calculation of depreciation expense. The constant depreciation rate is established first. For the first year, the beginning book value is the asset’s original cost.

To calculate depreciation expense, multiply the constant double-declining balance rate by the asset’s beginning book value. Subtract this expense from the beginning book value to get the ending book value. This ending book value becomes the next year’s beginning book value, creating a declining base for future calculations.

Consider an example: a company purchases equipment for $10,000 with a 5-year useful life and an estimated salvage value of $1,000. The straight-line rate is 1/5, or 20%, making the double-declining balance rate 40%.

For Year 1:
Beginning Book Value: $10,000
Depreciation Expense: $10,000 40% = $4,000
Ending Book Value: $10,000 – $4,000 = $6,000

For Year 2:
Beginning Book Value: $6,000
Depreciation Expense: $6,000 40% = $2,400
Ending Book Value: $6,000 – $2,400 = $3,600

For Year 3:
Beginning Book Value: $3,600
Depreciation Expense: $3,600 40% = $1,440
Ending Book Value: $3,600 – $1,440 = $2,160

This application of the fixed rate to the declining book value results in higher depreciation expenses in earlier years and lower expenses as the asset ages. This differs from the straight-line method, which allocates an equal amount of depreciation each year. The example demonstrates the core mechanics before considering salvage value limits or method switches.

Handling Salvage Value and the Switch to Straight-Line

While the double-declining balance method provides accelerated depreciation, two considerations arise near the end of an asset’s useful life: the salvage value limit and the potential switch to the straight-line method. An asset’s book value cannot be depreciated below its estimated salvage value. If calculated depreciation would cause the book value to fall below salvage value, the expense is limited to bring the book value down to the salvage value.

Companies often switch from double-declining balance to straight-line depreciation. This typically occurs when straight-line depreciation on the remaining balance becomes greater than the double-declining balance depreciation. This switch ensures the asset is fully depreciated to its salvage value by the end of its useful life.

Continuing the previous example with a $1,000 salvage value, the calculations for the final years demonstrate the salvage value limit and potential switch.

For Year 4:
Beginning Book Value: $2,160
Double Declining Balance Depreciation: $2,160 40% = $864
Remaining useful life: 2 years (Year 4 and Year 5)
Remaining depreciable balance: $2,160 (current book value) – $1,000 (salvage value) = $1,160
Straight-line depreciation on remaining balance: $1,160 / 2 years = $580

In Year 4, straight-line depreciation ($580) is less than double-declining balance depreciation ($864), so the double-declining balance method is still used.
Depreciation Expense for Year 4: $864
Ending Book Value: $2,160 – $864 = $1,296

For Year 5:
Beginning Book Value: $1,296
Double Declining Balance Depreciation: $1,296 40% = $518.40
Remaining useful life: 1 year
Remaining depreciable balance: $1,296 (current book value) – $1,000 (salvage value) = $296
Straight-line depreciation on remaining balance: $296 / 1 year = $296

For Year 5, straight-line depreciation ($296) is less than double-declining balance depreciation ($518.40). However, $518.40 would bring the book value below the salvage value ($777.60 vs. $1,000). Therefore, depreciation is limited to bring the book value down to the salvage value.
Depreciation Expense for Year 5: $1,296 – $1,000 = $296
Ending Book Value: $1,000 (salvage value)

This adjustment ensures the asset’s book value does not fall below its estimated salvage value, completing the depreciation.