How to Calculate Double Declining Balance

The Double Declining Balance (DDB) method is an accelerated approach to calculating an asset’s depreciation. It recognizes a larger portion of an asset’s value as an expense in its earlier years of use. This method is useful for assets that lose significant economic value or productivity quickly, aligning expense recognition with higher initial productivity.

Core Components of Depreciation

Before calculating depreciation, specific financial details about the asset are necessary. These components provide the baseline for determining how an asset’s value decreases over its operational life.

Asset cost represents the total amount incurred to acquire and prepare an asset for its intended use, including purchase price, shipping, installation, and setup costs. This initial cost serves as the starting point for all depreciation calculations.

Salvage value is the estimated residual value of an asset at the end of its useful life. This is the amount a company expects to receive if the asset is sold or scrapped. An asset cannot be depreciated below its salvage value, even if it’s zero.

Useful life is the estimated period an asset is expected to be used by the business to generate revenue. This is its economic life to the company, not necessarily its physical lifespan. Useful life directly influences the annual depreciation amount and the total period over which the asset’s cost is expensed.

Calculating Depreciation with Double Declining Balance

The Double Declining Balance method accelerates depreciation by applying a fixed rate to an asset’s decreasing book value each year. The calculation begins by determining the straight-line depreciation rate, found by dividing 1 by the asset’s useful life. This rate is then doubled to arrive at the double declining rate.

To calculate the annual depreciation expense, this double declining rate is multiplied by the asset’s book value at the beginning of the year. The book value is the asset’s original cost minus its accumulated depreciation from previous periods. Each year, as depreciation is recorded, the asset’s book value decreases, which causes the annual depreciation expense to decline over time.

Unlike the straight-line method, the Double Declining Balance method does not initially consider the salvage value in its annual calculation. However, the asset’s book value should never fall below its estimated salvage value. Depreciation stops once the book value reaches the salvage value, ensuring the asset is not over-depreciated.

The Switch to Straight-Line Depreciation

The Double Declining Balance method often involves a switch to straight-line depreciation. This ensures the entire depreciable cost of an asset is expensed down to its salvage value. The switch occurs when the annual depreciation calculated using the straight-line method on the remaining book value becomes greater than the depreciation calculated by the Double Declining Balance method.

To determine if a switch is needed, calculate the straight-line depreciation for the remaining book value by subtracting the salvage value from the current book value and dividing by the remaining useful life. If this straight-line calculation yields a higher depreciation amount than the DDB calculation for that year, the company switches to the straight-line method for the remaining years.

This ensures the asset is fully depreciated to its salvage value by the end of its useful life.

Illustrative Example

Consider a company that purchases machinery for $50,000. This machinery has an estimated useful life of 5 years and a salvage value of $5,000.

In the first year, the straight-line rate is 1/5, or 20%. Doubling this rate gives a DDB rate of 40%. The depreciation for Year 1 is $50,000 (book value) 40% = $20,000. The accumulated depreciation is $20,000, and the ending book value is $30,000 ($50,000 – $20,000).

For Year 2, the depreciation is $30,000 (book value) 40% = $12,000. Accumulated depreciation becomes $32,000, and the ending book value is $18,000 ($30,000 – $12,000). In Year 3, depreciation is $18,000 40% = $7,200. Accumulated depreciation totals $39,200, and the book value is $10,800.

Entering Year 4, the DDB calculation is $10,800 40% = $4,320. The straight-line depreciation for the remaining book value is ($10,800 – $5,000) / 2 years = $2,900. Since the DDB amount ($4,320) is greater than the straight-line amount ($2,900), the company continues with DDB for Year 4. Depreciation for Year 4 is $4,320, bringing the book value to $6,480 ($10,800 – $4,320).

For Year 5, the DDB calculation is $6,480 40% = $2,592. The straight-line depreciation for the remaining book value is ($6,480 – $5,000) / 1 year = $1,480. Since the straight-line amount ($1,480) is now less than the DDB amount ($2,592), the company switches to straight-line depreciation for Year 5. Depreciation for Year 5 is $1,480, bringing the book value down to the salvage value of $5,000.