What is Double Declining Balance Method?
The Double Declining Balance (DDB) Method is a system designed to accelerate the cost recovery of an asset's depreciable base. After all, most assets depreciate faster in their early years of service, and slower in their later years of service. The DDB method addresses that notion.
In fact, as the name suggests, the DDB method results in a first-year depreciation expense of double the amount that could be expensed using the straight-line method.
However, due to the way it's calculated, the DDB method of depreciating an asset rarely fully depreciates the asset by the end of the recovery period. Therefore most companies switch to the straight-line method during the final year(s) of the recovery period in order to fully depreciate the asset.
Another thing to keep in mind is that unlike the straight-line method, the DDB method ignores the salvage value in its calculations -- unless taking the full DDB depreciation for a given year would cause the book value to drop below the salvage value. In that case, only the excess of the depreciable base may be expensed for that year.
How to Calculate DDB
To calculate DDB, you first calculate the straight-line depreciation (SLD) expense percentage based on the acquisition cost (adjusted basis) of the asset -- while ignoring the salvage value -- and then double that percentage to arrive at the DDB percentage.
For example, if you purchased a machine costing $10,000, with a salvage value of $1,000 and a useful life of 5 years, the SLD rate would be equal to 100% divided by 5, or 20%. Next, double the SLD rate to get the DDB rate, which in this case would be 40%.
Therefore, the first year depreciation expense for the $10,000 machine would be equal to $4,000 (.40 X 10,000) -- provided the asset was placed in service on January 1, of that year.
For all remaining years, the DDB depreciation expense would be calculated by multiplying the book value (acquisition cost minus accumulated depreciation) by the 40% rate -- except in the case where that result would cause the book value to drop below the salvage value.
Example of How to Calculate Double Declining Depreciation
Referring to back to the machine example discussed earlier, if you expect the $10,000 machine to last for 5 years, with a salvage value of $1,000.00, and you place the machine in service in July of 2012, here is how you would calculate the double declining depreciation expense for the applicable years.
| Step 1: DDB rate = 100% / 5 years x 2 = 40% |
| Step 2: 1st year depreciation rate = 6 months / 12 months = .5 x 40% = 20% |
| Step 3: 1st year depreciation expense = $10,000 x 20% = $2,000 |
| Step 4: Subsequent years depreciation expense = book value * 40%. |
| Step 5: If necessary, adjust depreciation expense to preserve salvage value. |
Here is the depreciation schedule for the above example, as generated by the double declining balance calculator:
| Machine DDB Depreciation Schedule | ||||||
|---|---|---|---|---|---|---|
| # | Year | Beg
Val $Beg Val $Begin Value $Beginning Value $ | % | Deprec
Exp $Deprec Exp $Deprec Exp $Depreciation Expense $ | Accum
Dep $Accum Dep $Accum Deprec $Accumulated Depreciation $ | End
Val $End Val $Ending Value $Ending Value $ |
| 1 | 2012 | 10,000 | 20% | 2,000 | 2,000 | 8,000 |
| 2 | 2013 | 8,000 | 40% | 3,200 | 5,200 | 4,800 |
| 3 | 2014 | 4,800 | 40% | 1,920 | 7,120 | 2,880 |
| 4 | 2015 | 2,880 | 40% | 1,152 | 8,272 | 1,728 |
| 5 | 2016 | 1,728 | 40% | 691 | 8,963 | 1,037 |
| 6 | 2017 | 1,037 | 4% | 37 | 9,000 | 1,000 |
In the last line of the above depreciation schedule, you will note that the depreciation expense was adjusted downward so as not to depreciate the machine beyond its salvage value.
MACRS Depreciation
Please note that both the Straight-Line Depreciation Calculator and the Double Declining Balance Calculator are basically included here as learning tools and do not necessarily calculate depreciation in accordance with the IRS's Modified Accelerated Cost Recovery System (MACRS) methodology. For that you will want to visit the MACRS Depreciation Calculator.