Double-Declining Balance DDB Depreciation Method Definition With Formula

The amount used to determine the speed of the cost recovery is based on a percentage. The most common declining balance percentages are 150% (150% declining balance) and 200% (double declining balance). Because most accounting textbooks use double declining balance as a depreciation method, we’ll use that for our sample asset. In this case, the depreciation rate in the declining balance method can be determined by multiplying the straight-line rate by 2. For example, if the fixed asset’s useful life is 5 years, then the straight-line rate will be 20% per year.

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To calculate, the information we need is book value (Costs of assets) of assets, salvages value, depreciation rate, and useful life of assets. The MACRS method for short-lived assets uses the double declining balance method but shifts to the straight line (S/L) method once S/L depreciation is higher than DDB depreciation for the remaining life. The declining balance method is useful for recognized accelerated usage levels for equipment that tends to be used heavily. For example, laptop computers are typically only used for a few years, after which faster laptops become available and the older ones are more likely to be replaced.

• No actual cash is put aside, the accumulated depreciation account simply reflects that funds will be needed in the future to replace the fixed assets which are reducing in value due to wear and tear.
• The declining balance or reducing balance depreciation method considers the value of assets that are largely used or highly contribute to operation at the beginning and then subsequently decline.
• The SYD depreciation equation is more appropriate than the straight-line calculation if an asset loses value more quickly, or has a greater production capacity, during its earlier years.
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Differences Between Straight Line Method and Declining Balance Method

If the asset is sold within a few years of its acquisition, this can result in the recognition of a large gain, since the carrying amount of the asset is likely to be well below its market value. When this happens, the gains being recognized do not mean that the company is getting great prices on the assets it sells – only that their carrying amounts are quite low. The difference is that DDB will use a depreciation financial anxiety following covid rate that is twice that (double) the rate used in standard declining depreciation. Under the generally accepted accounting principles (GAAP) for public companies, expenses are recorded in the same period as the revenue that is earned as a result of those expenses. Where DBD is the declining-balance depreciation expense for the period, A is the accelerator, C is the cost and AD is the accumulated depreciation.

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Firms depreciate assets on their financial statements and for tax purposes in order to better match an asset’s productivity in use to its costs of operation over time. The following examples show the application of the double and 150% declining balance methods to calculate asset depreciation. In the above example, we assumed a depreciation rate equal to twice the straight-line rate.

Double Declining Balance Method (DDB)

The double-declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly. A declining balance method is used to accelerate the recognition of depreciation expense for assets during the earlier portions of their useful lives. This leaves less depreciation expense to be recognized later in their useful lives. To calculate depreciation under a declining method, multiply the book value of an asset at the beginning of the fiscal year by a multiple of the straight-line rate of depreciation. Examples of declining balance methods are the 150% declining balance method and the double declining balance method.

Small businesses looking for the easiest approach might choose straight-line depreciation, which simply calculates the projected average yearly depreciation of an asset over its lifespan. Since different assets depreciate in different ways, there are other ways to calculate it. Declining balance depreciation allows companies to take larger deductions during the earlier years of an assets lifespan. Sum-of-the-years’ digits depreciation does the same thing but less aggressively. Finally, units of production depreciation takes an entirely different approach by using units produced by an asset to determine the asset’s value.

Double Declining Balance (DDB) depreciation is a method of accelerated depreciation that allows for greater depreciation expenses in the initial years of an asset’s life. The depreciation expense recorded under the double declining method is calculated by multiplying the accelerated rate, 36.0% by the beginning PP&E balance in each period. The cost of an asset normally comprises depreciation and repairs and maintenance.

Companies need to opt for the right depreciation method, considering the asset in question, its intended use, and the impact of technological changes on the asset and its utility. DBM has pros and cons and is an ideal method for assets where technological obsolescence is very high. The declining balance method of Depreciation is also called the reducing balance method, where assets are depreciated at a higher rate in the initial years than in the subsequent years.

This formula is best for small businesses seeking a simple method of depreciation. DDB is ideal for assets that very rapidly lose their values or quickly become obsolete. This may be true with certain computer equipment, mobile devices, and other high-tech items, which are generally useful earlier on but become less so as newer models are brought to market.