Toward the end of its useful life, the vehicle loses a smaller percentage of its value every year. Accelerated depreciation techniques charge a higher amount of depreciation in the earlier years of an asset’s life. One way of accelerating the depreciation expense is the double decline depreciation method. Depreciation is a crucial concept in business accounting, representing the gradual loss of value in an asset over time. Among the various methods of calculating depreciation, the Double Declining Balance (DDB) method stands out for its unique approach.
DDB depreciation is less advantageous when a business owner wants to spread out the tax benefits of depreciation over the useful life of a product. This is preferable for businesses that may not be profitable yet and therefore may not be double declining balance method able to capitalize on greater depreciation write-offs, or businesses that turn equipment over quickly. In contrast to straight-line depreciation, DDB depreciation is highest in the first year and then decreases over subsequent years.
How to calculate Depreciation
Assuming there is no salvage value for the equipment, the business will report $4 ($20,000/5,000 items) of depreciation expense for each item produced. If 80 items were produced during the first month of the equipment’s use, the depreciation expense for the month will be $320 (80 items X $4). If in the next month only 10 items are produced by the equipment, only $40 (10 items X $4) of depreciation will be reported. 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 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. 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 years–that is, $30,000 minus $3,000, divided by 10. Depreciation rates between the two methods of calculating depreciation are similar except that the DDD Rate is twice the value of the SLD rate. In the depreciation of the asset for each period, the salvage value is not considered when doing calculations for DDD balance.