How to Calculate the Double Declining Balance Method

Depreciation is an accounting process used to allocate the cost of a tangible asset over its useful life. Rather than expensing the entire cost of a long-lived asset in the year it is purchased, depreciation systematically spreads that cost across the periods it benefits. The Double Declining Balance (DDB) method is an accelerated depreciation approach that recognizes a larger portion of an asset’s cost as an expense in its earlier years, with the expense gradually decreasing over time. This article provides a guide on how to calculate depreciation using the DDB method, outlining the necessary inputs and the step-by-step process.

Required Information for Calculation

Before performing any calculation using the Double Declining Balance method, specific pieces of information about the asset are necessary. The initial cost, also known as historical cost, represents the original purchase price of the asset. This figure includes not only the price paid to the vendor but also any additional costs incurred to get the asset ready for its intended use, such as shipping fees, installation charges, and testing costs. Under Generally Accepted Accounting Principles (GAAP), assets are typically recorded at this historical cost, which serves as the starting point for depreciation.

The useful life of an asset is another fundamental input, representing the estimated period, typically expressed in years, over which the asset is expected to be productive for the business. This estimate is influenced by factors such as anticipated wear and tear, technological obsolescence, and legal or contractual limits on its use. The useful life determines the duration over which the asset’s cost will be spread, directly impacting the depreciation rate.

The salvage value, also referred to as residual value, is the estimated resale value of an asset at the end of its useful life. This is the amount a business expects to receive for the asset when it is no longer useful for its primary purpose and is either sold or disposed of.

Performing the Calculation

The first step in applying the Double Declining Balance method involves determining the straight-line depreciation rate. This rate is calculated by dividing one by the asset’s useful life in years. For example, an asset with a five-year useful life would have a straight-line rate of 1/5, or 20%. This initial rate forms the foundation for the accelerated method.

Next, the straight-line rate is doubled to arrive at the Double Declining Balance (DDB) rate. This multiplication by two is why the method is called “double declining,” accelerating the depreciation recognized in the early years. This accelerated rate is then applied to the asset’s book value.

For the first year, the annual depreciation expense is calculated by multiplying the DDB rate by the asset’s initial cost. In subsequent years, the depreciation expense is determined by multiplying the DDB rate by the asset’s beginning-of-year book value. The book value is continually reduced by accumulated depreciation from prior periods, meaning the base for the depreciation calculation shrinks each year, leading to declining depreciation expense.

A fundamental rule of the Double Declining Balance method is that an asset cannot be depreciated below its salvage value. If applying the DDB rate in any given year would cause the asset’s book value to fall below its salvage value, the depreciation expense for that year must be adjusted. The expense is limited to the amount needed to bring the book value down to the salvage value, ensuring this floor is not breached.

Illustrative Calculation Example

Consider a hypothetical asset purchased for $10,000 with an estimated useful life of five years and a salvage value of $1,000. To begin, the straight-line depreciation rate is determined by dividing 1 by the useful life (1/5, or 20%). This rate is then doubled to arrive at the Double Declining Balance rate of 40%.

In Year 1, the depreciation expense is calculated by multiplying the DDB rate of 40% by the initial cost of $10,000, resulting in $4,000. Accumulated depreciation becomes $4,000, and the asset’s book value at the end of Year 1 is $6,000 ($10,000 initial cost minus $4,000 accumulated depreciation).

For Year 2, the depreciation expense is 40% of the beginning-of-year book value ($6,000), yielding $2,400. Accumulated depreciation increases to $6,400 ($4,000 + $2,400), and the book value at the end of Year 2 is $3,600 ($10,000 minus $6,400).

Year 3’s depreciation is 40% of the $3,600 beginning-of-year book value, equaling $1,440. Accumulated depreciation totals $7,840 ($6,400 + $1,440), leaving a book value of $2,160. In Year 4, 40% of the $2,160 beginning book value is $864 in depreciation. Accumulated depreciation reaches $8,704, and the book value drops to $1,296.

In Year 5, if applying the 40% rate to the $1,296 book value would result in $518.40 of depreciation, which would reduce the book value below the $1,000 salvage value. Therefore, the depreciation expense for Year 5 is limited to $296 ($1,296 book value minus $1,000 salvage value), ensuring the asset’s book value does not fall below its estimated residual value.