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Double-Declining Balance Method

The declining balance method of depreciation is an accelerated method that allows the company to recover its investment more rapidly. The amount of depreciation changes each period, with the early years taking higher amounts of depreciation. This method makes sense because a new asset is usually more productive than an older asset and is used more. There is a major difference between other depreciation methods and declining balance: Declining balance refers to the amount that is being depreciated each period. In other words, while other methods use the cost as the amount being depreciated, declining balance uses the book value.

Because $book value = cost - accumulated depreciation$ , the book value will decrease each period, and that decrease produces the declining balance.

The most common declining balance method is double declining balance (DDB). The word double comes from the fact that the depreciation rate is two times the straight-line depreciation rate; you simply multiply the straight-line rate by two.

Example: Double-Declining Balance

On January 1, 2017, your company purchased machinery for $50,000 cash. You've estimated that the machinery will last five years (estimated useful life). You've also estimated that the residual value of the machine at the end of five years will be $5,000. Calculate the depreciation expense, accumulated depreciation, and book value for each year during the five-year useful life of the asset and record the adjusting entry for 2017.

The depreciation expense for 2017 is calculated as follows (with book value referring to the original cost of the machine):

$depreciation expense = book value \times (straight-line rate \times 2)$
$depreciation expense = $ 50, 000 \times (\frac{1}{5} \times 2)$
$depreciation expense = $ 50, 000 \times \frac{2}{5}$
depreciation expense = $ 20 , 000

General Journal
Date	Accounts and explanation	Debit	Credit
December 31, 2017	Depreciation expense	$20,000	-
-	Accumulated depreciation	-	$20,000
-	Adjusting entry for depreciation	-	-

Double-Declining Balance Method: Depreciation for the Year
Date	Book value (beginning)	DDB rate	Depreciation expense	Accumulated depreciation	Book value (ending)
Dec. 31, 2017	$50,000 cost of machine	$\frac{2}{5}$	$20,000 $$50,000 \times \frac{2}{5}$	$20,000	$30,000 $$50,000 - $20,000$
Dec. 31, 2018	$30,000 equals 2017 ending book value	$\frac{2}{5}$	$12,000 $$3 0,000 \times \frac{2}{5}$	$32,000 $$20,000 + $12,000$	$18,000 $$50,000 - $32,000$
Dec. 31, 2019	$18,000 equals 2018 ending book value	$\frac{2}{5}$	$7,200 $$18,000 \times \frac{2}{5}$	$39,200 $$32,000 + $7,200$	$10,800 $$50,000 - $39,200$
Dec. 31, 2020	$10,800 equals 2019 ending book value	$\frac{2}{5}$	$4,320 $$10, 800 \times \frac{2}{5}$	$43,520 $$39,200 + $4,320$	$6,480 $$50,000 - $43,520$
Dec. 31, 2021	$6,480	Plug	$1,480 see explanation below	$45,000 $$43,520 + $1,480$	$5,000 $$50,000 - $45,000$

For the year ended December 31, 2021, you cannot simply multiply the beginning book value by ⅖. If you multiplied the beginning book value for 2021 ($6,480) by ⅖, you would get $2,592. You cannot deduct the entire amount of $2,592 in 2021—doing so would cause you to depreciate more than the depreciable cost of $45,000 over the life of the asset. In this case, you calculate the dollar amount needed for the final year in order to make sure that the total in the accumulated depreciation ledger account at the end of 2021 equals the depreciable cost ($45,000, in this example) and that the book value at the end of 2021 equals the residual value ($5,000). The calculation for 2021 depreciation expense is shown below:

$depreciation expense (2021) = depreciable cost - accumulated depreciation (2020)$
$depreciation expense (2021) = $ 45, 000 - $ 43, 520$
depreciation expense (2021) = $ 1 , 480

The amount shown in the depreciation expense column is the dollar amount you will use for the adjusting entry to record depreciation expense for the year. The accumulated depreciation column shows the balance in the accumulated depreciation ledger account at the end of the year after the adjusting entry has been recorded. Book value at the end of each year equals the original cost of the asset minus the balance in accumulated depreciation at the end of the year. The dollar amount for book value will appear on the balance sheet at the end of the year. At the end of the useful life of this asset, the balance in accumulated depreciation must equal cost of the asset minus residual value, $45,000. The book value of this asset must equal the residual value, $5,000.

Partial-Year Depreciation

One issue to consider is the fact that very few purchases occur on January 1; most purchases occur throughout the year. You cannot simply assign a full year of depreciation to purchases that were not made prior to January 15!

The common rounding method considers that, if you owned the asset for more than half the month, you are entitled to the depreciation for that entire month. If you purchase an asset on or before the 15th of the month, you can take the full month’s depreciation. If the asset is purchased after the 15th, you will treat it as if it were purchased at the beginning of the following month. You will calculate annual depreciation based on the number of months the asset is owned for the year.

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