please explain Double Declining Balance Depreciation Method
 

please explain Double Declining Balance Depreciation Method

Double Declining Balance Depreciation

The double declining balance method is an accelerated form of depreciation under which the vast majority of the depreciation associated with a fixed asset is recognized during the first few years of its useful life. This approach is reasonable under either of the following two circumstances:

When the utility of an asset is being consumed at a more rapid rate during the early part of its useful life; or
When the intent is to recognize more expense now, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes).


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The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a common form of accelerated depreciation. Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than the total depreciation using the straight line method. This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation.

Under the double declining balance method, double means twice or 200% of the straight line depreciation rate. Declining balance refers to the asset's book value or carrying value at the beginning of the accounting period. Book value is an asset's cost minus its accumulated depreciation. The asset's book value will decrease when the contra asset account Accumulated Depreciation is credited with the depreciation expense of the accounting period.

[B][U]Example for Explanation [/U][/B]

Let's illustrate double declining balance depreciation with an asset that is purchased on January 1 at a cost of $100,000 and is expected to have no salvage value at the end of its useful life of 10 years. Under the straight line method, the 10 year life means the asset's annual depreciation will be 10% of the asset's cost. Under the double declining balance method the 10% straight line rate is doubled to be 20%. However, the 20% is multiplied times the asset's beginning of the year book value instead of the asset's original cost. At the beginning of the first year, the asset's book value is $100,000 since there has not yet been any depreciation recorded. Therefore, under the double declining balance method the $100,000 of book value will be multiplied by 20% for depreciation in Year 1 of $20,000. The journal entry will be a debit of $20,000 to Depreciation Expense and a credit to Accumulated Depreciation of $20,000.

At the beginning of the second year, the asset's book value will be $80,000. This is the asset's cost of $100,000 minus its accumulated depreciation of $20,000. The $80,000 of beginning book value multiplied by 20% results in $16,000. The depreciation entry for Year 2 will be a debit to Depreciation Expense for $16,000 and a credit to Accumulated Depreciation for $16,000.

At the beginning of Year 3, the asset's book value will be $64,000. This is the asset's cost of $100,000 minus its accumulated depreciation of $36,000 ($20,000 + $16,000). The book value of $64,000 X 20% = $12,800 of depreciation expense for Year 3.

At the beginning of Year 4, the asset's book value will be $51,200. This is the asset's cost of $100,000 minus its accumulated depreciation of $48,800 ($20,000 + $16,000 + $12,800). The book value of $51,200 X 20% = $10,240 of depreciation expense for Year 4.

As you can see, the amount of depreciation expense is declining each year. Over the remaining six years there can be only $40,960 of additional depreciation. This is the asset's cost of $100,000 minus its accumulated depreciation of $59,040. Some people will switch to straight line at this point and record the remaining $40,960 over the remaining 6 years in equal amounts of $6,827 per year. Others may choose to follow the original formula.

[QUOTE=Zubair Gilgiti;919410]The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a common form of accelerated depreciation. Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than the total depreciation using the straight line method. This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation.

Under the double declining balance method, double means twice or 200% of the straight line depreciation rate. Declining balance refers to the asset's book value or carrying value at the beginning of the accounting period. Book value is an asset's cost minus its accumulated depreciation. The asset's book value will decrease when the contra asset account Accumulated Depreciation is credited with the depreciation expense of the accounting period.

[B][U]Example for Explanation [/U][/B]

Let's illustrate double declining balance depreciation with an asset that is purchased on January 1 at a cost of $100,000 and is expected to have no salvage value at the end of its useful life of 10 years. Under the straight line method, the 10 year life means the asset's annual depreciation will be 10% of the asset's cost. Under the double declining balance method the 10% straight line rate is doubled to be 20%. However, the 20% is multiplied times the asset's beginning of the year book value instead of the asset's original cost. At the beginning of the first year, the asset's book value is $100,000 since there has not yet been any depreciation recorded. Therefore, under the double declining balance method the $100,000 of book value will be multiplied by 20% for depreciation in Year 1 of $20,000. The journal entry will be a debit of $20,000 to Depreciation Expense and a credit to Accumulated Depreciation of $20,000.

At the beginning of the second year, the asset's book value will be $80,000. This is the asset's cost of $100,000 minus its accumulated depreciation of $20,000. The $80,000 of beginning book value multiplied by 20% results in $16,000. The depreciation entry for Year 2 will be a debit to Depreciation Expense for $16,000 and a credit to Accumulated Depreciation for $16,000.

At the beginning of Year 3, the asset's book value will be $64,000. This is the asset's cost of $100,000 minus its accumulated depreciation of $36,000 ($20,000 + $16,000). The book value of $64,000 X 20% = $12,800 of depreciation expense for Year 3.

At the beginning of Year 4, the asset's book value will be $51,200. This is the asset's cost of $100,000 minus its accumulated depreciation of $48,800 ($20,000 + $16,000 + $12,800). The book value of $51,200 X 20% = $10,240 of depreciation expense for Year 4.

As you can see, the amount of depreciation expense is declining each year. Over the remaining six years there can be only $40,960 of additional depreciation. This is the asset's cost of $100,000 minus its accumulated depreciation of $59,040. Some people will switch to straight line at this point and record the remaining $40,960 over the remaining 6 years in equal amounts of $6,827 per year. Others may choose to follow the original formula.[/QUOTE]
Great explanation, Sir. Jzaka-Allah

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