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Assets have a discrete life, and as such, are eligible to be depreciated over time.

With the double declining balance method, you depreciate less and less of an asset’s value over time. That means you get the biggest tax write-offs in the years right after you’ve purchased vehicles, equipment, tools, real estate, or anything else your business needs to run.

What is depreciation?

As described in detail in our article titled What is Depreciation, depreciation is the act of writing off an asset’s value over time. The double declining balance method of depreciation is one common means of doing exactly that.

Double Declining Balance Method

The double declining balance depreciation method is one of two commonly applied methods a business uses to account for the expense of an asset with useful life in excess of 1 year. It’s recognized by the IRS as a way of accelerating depreciation, or in other words, realizing more depreciation early in an assets useful life.

In short, companies employ the double declining method for assets that are expected to lose ore of their value early in the life cycle.

Double Declining Balance Compared to Straight Line Depreciation

The simplest method of calculating depreciation is the straight line depreciation method. The straight-line method of depreciation assumes a steady rate of depreciation, calculating a constant rate of depreciation over its useful life. Or stated otherwise, it depreciates an asset an equal amount over each year of its useful life. It’s simple in that it is used to write off an identical depreciation expense every year of the assets useful life.

For example, when as an asset was purchased for a total of $1,800, minus $300 for its salvage value at the end of its useful life, a business would write off $150 per year for 10 years.

Declining Balance vs. Straight Line Depreciation Graph

Declining Balance vs. Straight Line Depreciation Comparison Table

The following chart demonstrates how both methods reach the same depreciation total for the example, but accomplish that by weighting the depreciation realized each year differently:


Straight Line Depreciation

Double Declining Depreciation

Year 1 Depreciation
$300$720

Year 2 Depreciation
$300$432

Year 3 Depreciation
$300$259

Year 4 Depreciation
$300$89

Year 5 Depreciation
$300$0

Total Depreciation
$1500$1500
Depreciation Methods Comparison

Double Declining Balance Formula

The double declining depreciation formula is relatively simple formula, calculated as follows:

Depreciation = 2 X Straight Line Depreciation Rate X Book Value

Or expressed differently:

2

x

Straight Line Depreciation Rate

x

Book Value

Calculating Straight Line Depreciation Rate (AKA. basic depreciation rate)

The basic depreciation rate is the rate at which the asset depreciates when using the straight line method. to ascertain that, begin by determining:

Calculation #1:

(Purchase Price – Salvage Value) / Useful Life

This will provide you with your basic yearly depreciable amount, or your write-off.

Calculation #2:

Basic Yearly Write-Off / Purchase Price

The result is your straight line depreciation rate, or your basic depreciation rate.

Calculation #3:

Book Value

Every year a depreciable asset is written off using the double declining balance method, the amount is subtracted from the book value, making it such that the book value of the asset declines every year of its useful life. It’s important here to track accumulated depreciation for the asset.

Calculation #4:

2 X Straight Line Depreciation Rate x Book Value

Double Declining Balance Example

Example Scenario:

  • Purchase Price: Your company purchases a computer which costs $1,800 after all taxes and expenses.
  • Useful Life: Per the IRS Useful Life Table, computers may be depreciated over a 5 year useful life.
  • Salvage Value: $300

Calculation #1:

Figure out the basic yearly write-off for the computer ((Purchase Price – Salvage Value) / Useful Life) =

$1,500 (purchase price – salvage value) / 5 years (useful life) = $300

Calculation #2:

Figure out the straight line rate of depreciation for the computer (Basic Yearly Write-Off / (Purchase Price – Salvage Value)) =

$300 / $1,500 = 0.2 (or 20%)

Calculation #3:

Calculate the book value of the computer whereby each year the amount you depreciated over previous years are deducted from the book value of the computer which will begin at the full purchase price amount in Year 1, and go down every year of its useful life until it reaches $0.

For Year 1 = $1,500 – $0 = $1,500

Remember to do this step every year by tracking the accumulated depreciation which we’ll illustrate lower down.

Calculation #4:

Enter the straight line depreciation rate with the book value for Year 1 into the double declining depreciation formula (Depreciation = 2 X Straight Line Depreciation Rate X Book Value) as follows:

2 X 0.2 X $1,800 = $720

In Year 1, this business will write off $720 as a depreciation expense from the value of the computer. The Book Value goes down each year as accumulated depreciation grows.

Tracking Book Value for Double Declining Method

Given Book Value declines each year as asset is depreciated until it reaches its salvage value, it’s required that the Book Value is tracked, which adds additional work to your accounting team or process. Here’s how the Book Value would be tracked for our example:


Double Declining
Depreciation

Book Value

Year 1 Depreciation
$720$1800 – $720 = $1080

Year 2 Depreciation
$432$1080 – $432 = $648

Year 3 Depreciation
$259$648 – $259 = $389

Year 4 Depreciation
$89$0

Year 5 Depreciation
$0$0

Total Depreciation
$1500
Depreciation Methods Comparison

Notes about our example using Double Declining Method

  1. Switch to the straight line method – Accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double the declining method. For example, in Year 4 of our example, you’d depreciate $89 under the double declining method versus $300 with the straight line so you’d make the switch at that time.
  2. Once fully depreciated, list the asset’s salvage value on the books.

Expert Help

When it’s time to select a depreciation method, consider enlisting the help of a CPA as depreciation can be complex, and this is merely an introduction. An experienced CPA will be able to guide you through the process, avoiding costly mistakes along the way.