Double-Declining Balance (DDB) Depreciation Method
What Is the Double-Declining Balance (DDB) Depreciation Method?
The double-declining balance depreciation (DDB) method, otherwise called the lessening balance method, is one of two common methods a business uses to account for the expense of a seemingly perpetual asset. The double-declining balance depreciation method is a accelerated depreciation method that considers an expense all the more quickly (when compared to straight-line depreciation that utilizes a similar amount of depreciation every year over an asset's valuable life). Essentially, compared to the standard declining balance method, the double-declining method devalues assets two times as fast.
Double-Declining Balance (DDB) Depreciation Formula
Grasping DDB Depreciation
The declining balance method is one of the two accelerated depreciation methods and it utilizes a depreciation rate that is some various of the straight-line method rate. The double-declining balance (DDB) method is a type of declining balance method that rather utilizes double the normal depreciation rate.
Depreciation rates utilized in the declining balance method could be 150%, 200% (double), or 250% of the straight-line rate. At the point when the depreciation rate for the declining balance method is set as a numerous, doubling the straight-line rate, the declining balance method is really the double-declining balance method. Over the depreciation cycle, the double depreciation rate stays consistent and is applied to the lessening book value every depreciation period. The book value, or depreciation base, of an asset, declines after some time.
With the consistent double depreciation rate and a progressively lower depreciation base, charges calculated with this method constantly drop. The balance of the book value is in the end diminished to the asset's salvage value after the last depreciation period. In any case, the last depreciation charge might need to be limited to a lesser amount to keep the salvage value as estimated.
Under the generally accepted accounting principles (GAAP) for public companies, expenses are kept in the very period as the revenue that is earned because of those expenses. Hence, when a company purchases a costly asset that will be utilized for a long time, it doesn't deduct the whole purchase price as a business expense in the extended period of purchase however rather deducts the price north of several years.
Since the double-declining balance method brings about bigger depreciation expenses close to the beginning of an asset's life — and more modest depreciation expenses later on — it's a good idea to utilize this method with assets that lose value rapidly.
Accelerated Depreciation
Double declining balance depreciation considers higher depreciation expenses in early years and lower expenses as an asset approaches the finish of its life. This is viewed as an accelerated depreciation method.
Illustration of DDB Depreciation
As a theoretical model, assume a business purchased a $30,000 delivery truck, which was expected to last for quite some time. Following 10 years, it would be worth $3,000, its salvage value. Under the straight-line depreciation method, the company would deduct $2,700 each year for a considerable length of time that is, $30,000 minus $3,000, separated by 10.
Utilizing the double-declining balance method, in any case, one would initially compute the straight-line depreciation (SLDP) as 1/10 years of helpful life = 10% each year. They would then double the SLDP (10%x2=20%) and consequently deduct 20% of $30,000 ($6,000) in year one, 20% of $24,000 ($4,800) in year two, etc, halting when the book value approached the salvage value.
Features
- The double-declining balance (DDB) method is an accelerated depreciation calculation utilized in business accounting.
- Thus, companies opt for the DDB method for assets that are probably going to lose the majority of their value from the get-go, or which will become obsolete all the more rapidly.
- The DDB method records bigger depreciation expenses during the prior long periods of an asset's helpful life, and more modest ones in later years.
- In particular, the DDB method devalues assets two times as fast as the traditional declining balance method.
FAQ
Why Is Double Declining Depreciation an Accelerated Method?
Accelerated depreciation is a method of depreciation utilized for accounting or income tax purposes that permits greater depreciation expenses in the early long periods of the life of an asset. Accelerated depreciation methods, for example, double declining balance (DDB), means there will be higher depreciation expenses in the initial not many years and lower expenses as the asset ages. This is not normal for the straight-line depreciation method, which spreads the cost equally over the life of an asset.
What Is Depreciation?
Depreciation is an accounting cycle by which a company dispenses an asset's cost all through its useful life. All in all, it records how the value of an asset declines over the long run. Firms devalue assets on their financial statements and for tax purposes to better match an asset's productivity being used to its costs of operation over the long run.
How Does DDB Differ From Declining Depreciation?
Both DDB and ordinary declining depreciation are accelerated methods. The difference is that DDB will utilize a depreciation rate that is two times that (double) the rate utilized in standard declining depreciation.
What Assets Are DDB Best Used For?
DDB is great for assets that quickly lose their values or immediately become obsolete. This might be true with certain computer equipment, mobile gadgets, and other super advanced things, which are generally valuable prior on however become less so as fresher models are brought to market.
