The double-declining balance method is an accelerated method of depreciation in which depreciation is recognized at twice the rate recognized under the straight-line method.
The double-declining balance method is one of two most common methods of accelerated depreciation. The other accelerated method is the sum of the years’ digits method. Unlike straight-line depreciation, which recognizes depreciation at a constant rate over the asset’s life, accelerated depreciation recognizes a greater amount of depreciation in an asset’s early life.
For an example of the double-declining balance method, consider the following scenario.
A company purchases a piece of equipment for $85,000. The estimated residual value is 10% of the purchase price, or $8,500. The asset has an estimated life of 5 years. What is the yearly depreciation under the double-declining balance method?
First, we recognize that the yearly straight-line rate is 20%. Depreciation under the double-declining balance method is 2 x 20% = 40% per year calculated on the asset’s beginning carrying value. In the first year, depreciation is $85,000 x .4 = $34,000 and the ending carrying value is $51,000. Depreciation in the second year is $51,000 x .4 = $20,400 and the ending carrying value is $30,600. Depreciation in the third year is $30,600 x .4 = $12,240 and the ending carrying value is $18,360. Depreciation in the fourth year is $18,360 x .4 = $7,344 and the ending carrying value is $11,016. Since the residual value is $8,500, depreciation in the fifth year is $11,016 – $8,500 = $2,516.
Note that under the straight-line method, yearly depreciation in the above example would have been $15,300. Thus, double-declining depreciation led to higher depreciation in the first two years, and lower depreciation in years three through five.
