What Is the Double Declining Balance Method?

The double declining balance method is a way of calculating depreciation expenses on fixed assets over their useful life. It is one of the ways used by businesses to recognize the decrease in value of long-term assets such as buildings, equipment, and vehicles. The method is also known as the reducing balance method or the declining balance method.

How Does Double Declining Balance Method Work?

The double declining balance method uses an accelerated depreciation method, which means that it is a faster way of depreciation as compared to the straight line method. Under this method, a fixed percentage, usually double of the straight line method, is applied against the asset’s original cost or book value. The resulting amount is recorded as the charge for depreciation expense in the year. So, in double declining balance, the depreciation expense is larger in the early years of an asset’s useful life and decreases in the later years.

Example of the Double Declining Balance Method

To illustrate the double declining balance method, let’s take the example of a computer purchased at $1,800. Let’s assume the asset’s useful life is five years and the rate of depreciation is 40%.

Year 1: Depreciation Expense = 1800 * 40% = $720
Year 2: Depreciation Expense = (1800 – 720) * 40% = $432
Year 3: Depreciation Expense = (1800 – (720 + 432)) * 40% = $259.2

And so on, until the fifth year when the remaining value of the asset is zero. Since the depreciation rate is higher in this method, the total amount of depreciation in five years will be higher than the amount recorded in the straight line method.

Benefits of the Double Declining Balance Method

The main advantage of the double declining balance method is that it allows businesses to realize a tax saving in the short run. This is done by allocating a higher charge for depreciation in the earlier years of an asset’s life, thus reducing the taxable income. The double declining balance method is especially beneficial for businesses that purchase large-ticket items in the beginning of a year, since it allows them to realize a tax saving right away.

Limitations of the Double Declining Balance Method

While the double declining balance method is beneficial for a few reasons, there are also some disadvantages to using this method. One of the main drawbacks is that the accelerated depreciation method used in this method does not accurately reflect the wear and tear of the asset over its useful life. Additionally, this method causes the company’s balance sheet to reflect a lower amount of assets than its true value since the depreciation expense is greater in the initial years.

Overall, the double declining balance method is an accelerated method of depreciation that can help businesses recognize the decrease in value of their fixed assets. While it is beneficial in the short run, there are some limitations to its use that must be taken into account.