The double-declining balance (DDB) method, also referred to as the reducing balance method, is an accounting approach used to more rapidly depreciate the value of long-lived assets. Unlike the straight-line depreciation method, which depreciates assets evenly over their useful lives, DDB accelerates the recognition of expense by depreciating the asset’s value at twice the rate of the declining balance method.
Key Takeaways
- The double-declining balance (DDB) method is an accelerated depreciation calculation used in business accounting.
- Specifically, the DDB method depreciates assets twice as fast as the traditional declining balance method.
- The DDB method records larger depreciation expenses during the earlier years of an asset’s useful life, and smaller ones in later years.
- Companies opt for the DDB method for assets that are likely to lose most of their value early on or quickly become obsolete.
Example: Double Declining Balance Depreciation Calculation
Double-Declining Balance (DDB) Depreciation Formula
To calculate DDB depreciation:
Depreciation = 2 × SLDP × BV
where:
SLDP = Straight-line depreciation percent
BV = Book value at the beginning of the period
Understanding DDB Depreciation
The declining balance method is a popular accelerated depreciation method that uses a depreciation rate higher than the straight-line method’s rate. The double-declining balance (DDB) method further accelerates this by using double the normal depreciation rate.
Depreciation rates used in the declining balance method could be 150%, 200% (double), or 250% of the straight-line rate. When the rate is set to double the straight-line rate, it becomes the double-declining balance method. The constant double depreciation rate is applied to the reducing book value each depreciation period, reducing the asset’s book value systematically.
Over time, the method results in successively smaller depreciation charges. Eventually, the book value is reduced to the asset’s salvage value. Occasionally, the final depreciation charge may need adjustment to remain within the salvage value.
Generally accepted accounting principles (GAAP) mandate recording expenses in the same period as the revenue obtained from those expenses. Hence, when an asset’s value declines mainly early in its life span, using DDB depreciation aligns the expense recognition with the asset’s realized utility.
Accelerated Depreciation
Double declining balance depreciation facilitates higher initial deprecation expenses. This method allows businesses to take substantial deductions early and balance revenue over the asset’s lifespan.
Example of DDB Depreciation
Consider a business buying a $30,000 delivery truck expected to last for 10 years with a $3,000 salvage value. Under the straight-line method, the company would deduct $2,700 annually ($30,000 - $3,000 / 10 years).
Using DDB, one first calculates the straight-line depreciation (SLDP) as 10% per year (1/10 years). Doubling this gives 20%, which results in deductions of 20% of $30,000 ($6,000) in year one, 20% of $24,000 ($4,800) in year two, etc., until the book value reaches the salvage value.
What Is Depreciation?
Depreciation allocates an asset’s cost over its useful life. It records value reduction over time, aligning an asset’s productive use with operational costs, reflecting maintenance and loss of value.
Why Is Double Declining Depreciation an Accelerated Method?
Accelerated depreciation provides higher deductions in early years, tapering off towards the asset’s end-of-life, contrary to methods like straight-line depreciation, which spread the cost uniformly.
How Does DDB Differ From Declining Depreciation?
DDB utilizes a depreciation rate double that of a standard declining balance method, effectively accelerating expense recognition.
What Assets Are DDB Best Used For?
DDB is optimal for assets that lose value quickly or become obsolete. Examples include certain computer equipment, mobile devices, and other high-tech items benefiting from significant early-period expenses.
Related Terms: Accelerated Depreciation, Straight-Line Depreciation, Declining Balance Method, Book Value, Useful Life, Salvage Value.
References
- Financial Accounting Standards Board. “FASB Special Report: The Framework of Accounting Concepts and Standards”. Page 27–29.
- Internal Revenue Service. “Publication 946 (2023), How to Depreciate Property”.
