Typically, accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double declining. For instance, in the fourth year of our example, you’d depreciate $2,592 using the double declining method, or $3,240 using double declining balance method straight line. Now you’re going to write it off your taxes using the double depreciation balance method. By reducing the value of that asset on the company’s books, a business is able to claim tax deductions each year for the presumed lost value of the asset over that year.
It is calculated by multiplying a fraction by the asset’s depreciable base in each year. The fraction uses the sum of all years’ digits as the denominator and starts with the largest digit in year 1 for the numerator. For example, a company that owns an asset https://www.bookstime.com/ with a useful life of five years will multiply the depreciable base by 5/15 in year 1, 4/15 in year 2, 3/15 in year 3, 2/15 in year 4, and 1/15 in year 5. Overall, the double-declining balance depreciation method is an accelerated depreciation technique.
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Usually, they can use the straight-line depreciation percentage and double it to calculate the depreciation under this method. However, companies can also establish a double charge compared to that under the declining balance method. The double-declining balance depreciation method produces a different charge for each period.
It would consist of multiplying two times the basic depreciation rate by the book value. We will have to explain previous concepts such as depreciation and double-declining balance. But, to get a head start, we can say that using the double-declining balance formula is how you can reduce the depreciation process of an asset’s value over time. The DDB method is particularly relevant in industries where assets depreciate rapidly, such as technology or automotive sectors.