depreciation rates

Suppose a company purchased a fixed asset (PP&E) at a cost of $20 million. But before we delve further into the concept of accelerated depreciation, we’ll review some basic accounting terminology. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time. Salvage value is the estimated book value of an asset after depreciation.


In the case of 200%, the asset will depreciate twice as fast as it would under straight-line depreciation. The main downsides of using the DDB depreciation method is that it’s complicated to use and earns you less money in tax deductions later on. You get more money back in tax write-offs early on, which can help offset the cost of buying an asset. If you’ve taken out a loan or a line of credit, that could mean paying off a larger chunk of the debt earlier—reducing the amount you pay interest on for each period. In later years, as maintenance becomes more regular, you’ll be writing off less of the value of the asset—while writing off more in the form of maintenance. So your annual write-offs are more stable over time, which makes income easier to predict.

Double Declining Method Example

See the screenshot below for the facts of the we will depreciate using the variable-declining balance for the MACRS half-year convention. This approach is reasonable when the utility of an asset is being consumed at a more rapid rate during the early part of its useful life. It is also useful when the intent is to recognize more expense now, thereby shifting profit recognition further into the future . Subtract salvage value from book value to determine the asset’s total depreciable amount. This isn’t necessarily a problem, but it can make it more complicated to do things like accurately predict your company’s future profits and expenses.

Over the life of the equipment, the maximum total amount of depreciation expense is $10,000. However, the amount of depreciation expense in any year depends on the number of images. The cost of the truck including taxes, title, license, and delivery is $28,000. Because of the high number of miles you expect to put on the truck, you estimate its useful life at five years.

Calculating double-declining balance depreciation for tax purposes in Excel

As years go by and you deduct less of the asset’s value, you’ll also be making less income from the asset—so the two balance out. Your basic depreciation rate is the rate at which an asset depreciates using the straight line method. If you’re brand new to the concept, open another tab and check out our complete guide to depreciation. Then come back here—you’ll have the background knowledge you need to learn about double declining balance.

  • Depreciation is an accounting method companies use to allocate and estimate an asset’s costs over the course of its useful life.
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  • To calculate depreciation based on a different factor use our Declining Balance Calculator.
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  • Extensions allow extra time to file a tax return, but it does not give you extra time to pay.
  • The other downside can be a reduction in net income due to the increased depreciation expense.
  • The double declining balance method describes an approach to accounting for the depreciation of fixed assets where the depreciation expense is greater in the initial years of the asset’s assumed useful life.

Instead of appearing as a sharp jump in the accounting books, this can be smoothed by expensing the asset over its useful life. Within a business in the U.S., depreciation expenses are tax-deductible. Calculate the depreciation expenses for 2011, 2012 and 2013 using 150 percent declining balance depreciation method. Like straight-line depreciation use a consistent rate of depreciation for each year of an asset’s lifespan, accelerated depreciation methods like DBB show a steep drop in the first years of the asset’s life. After this, there will be increasingly smaller depreciation expenses recorded over the later years of the lifespan.

Definition of Double Declining Balance Method

For reporting purposes, accelerated depreciation results in the recognition of a greater depreciation expense in the initial years, which directly causes early period profit margins to decline. Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the asset’s utility is consumed at a more rapid rate during the earlier phases of its useful life. As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years–that is, $30,000 minus $3,000, divided by 10. With the constant double depreciation rate and a successively lower depreciation base, charges calculated with this method continually drop. The balance of the book value is eventually reduced to the asset’s salvage value after the last depreciation period.

For mid quarter convention will have 1.5, 4.5, 7.5 or 10.5 for double declining balance methods in first year for service starting within the 4th, 3rd, 2nd or 1st quarter respectively. We’ll now move on to a modeling exercise, which you can access by filling out the form below. Determine the salvage value of the asset, i.e., the value at which the asset can be sold or disposed of after its useful life is over.

Examples of Units-of-Activity Depreciation

With depreciation, a business will recognize depreciation expense every accounting period . Similar to declining balance depreciation, sum of the years’ digits depreciation also results in faster depreciation when the asset is new. It is generally more useful than straight-line depreciation for certain assets that have greater ability to produce in the earlier years, but tend to slow down as they age.

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  • The double-declining balance method is one of the depreciation methods used in entities nowadays.
  • Unlike straight line depreciation, which stays consistent throughout the useful life of the asset, double declining balance depreciation is high the first year, and decreases each subsequent year.
  • The company would deduct $9,000 in the first year, but only $7,200 in the second year.