Double Declining Balance (DDB) Depreciation

Double declining balance depreciation is an accelerated method that depreciates assets twice the rate of straight-line rate.

What is Double Declining Balance Depreciation Method?

Double declining balance (DDB) depreciation is an accelerated depreciation method that allows for higher depreciation expenses in the earlier years of an asset’s useful life. This method is based on the principle that assets tend to lose their value more rapidly in the early years of their use.

How Double Declining Balance Depreciation Works

1. Determine the Cost of the Asset: The initial purchase price of the asset plus any costs to prepare it for use.
2. Estimate the Useful Life: The period over which the asset is expected to be used.
3. Calculate the Straight-Line Depreciation Rate:
   • The straight-line depreciation rate is calculated as 100%/Useful Life​. For example, if an asset has a useful life of 5 years, the straight-line rate is 100%/5=20%.
4. Double the Straight-Line Rate: Double declining balance uses twice this rate. For the above example, it would be 20%×2=40%.
5. Apply the Depreciation Rate to the Book Value: Depreciation is calculated by applying the double declining rate to the asset’s book value (cost minus accumulated depreciation) at the beginning of each year.

Example Calculation

Let’s say a company buys a machine for $10,000, with a useful life of 4 years and no residual value.

1. Cost of the Asset: $10,000
2. Useful Life: 4 years
3. Straight-Line Depreciation Rate: 100%/4=25%
4. Double Declining Rate: 25%×2=50%

Depreciation for Each Year:

1. Year 1:
   • Depreciation Expense: $10,000 \times 50% = $5,000
   • Book Value at End of Year 1: $10,000 – $5,000 = $5,000
2. Year 2:
   • Depreciation Expense: $5,000 \times 50% = $2,500
   • Book Value at End of Year 2: $5,000 – $2,500 = $2,500
3. Year 3:
   • Depreciation Expense: $2,500 \times 50% = $1,250
   • Book Value at End of Year 3: $2,500 – $1,250 = $1,250
4. Year 4:
   • Depreciation Expense: $1,250 \times 50% = $625
   • Book Value at End of Year 4: $1,250 – $625 = $625
   Note: You would typically stop depreciating once the book value equals the asset’s residual value. In this example, no residual value means the asset will be depreciated fully, or adjustments might be made to ensure the final book value aligns with any set residual value.

Advantages of Double Declining Balance Depreciation

1. Accelerated Expense Recognition: Provides higher depreciation expenses earlier, which can be beneficial for tax purposes, especially if the asset’s usage or benefit is greater in the earlier years.
2. Reflects Actual Usage: Often better matches the asset’s actual decline in value and wear and tear, as many assets lose value more quickly initially.

Disadvantages of Double Declining Balance Depreciation

1. Complexity: More complex to calculate and track compared to straight-line depreciation.
2. Reduced Depreciation Later: Depreciation expense decreases over time, which might not accurately reflect the asset’s utility in its later years.
3. Potential for Misalignment: If the asset does not lose value as quickly as assumed, this method may overstate early depreciation expenses and understate later expenses.

Accounting Entries

For each year, the company will record depreciation as follows:

• Debit: Depreciation Expense (Income Statement)
• Credit: Accumulated Depreciation (Balance Sheet, Contra-asset account)

Example Journal Entry for Year 1:

• Debit: Depreciation Expense $5,000
• Credit: Accumulated Depreciation $5,000

In summary, the double declining balance method is an accelerated depreciation technique that allows businesses to write off the cost of an asset more quickly in its early years. It provides a way to match higher depreciation expenses with the asset’s potentially higher usage and wear during its initial period, though it can be more complex to apply and track compared to straight-line depreciation.