Double Declining Depreciation method is an accelerated depreciation method where the depreciation expense decreases with the age of the asset. In this method, the depreciation rate is applied double to that in straight line method therefore it is also known as 200 times declining balance method.
The depreciation expense in this method, will be faster in the early years of the asset’s life but slower in the later years. However, the total amount of depreciation expense during the life of the assets will be the same.
FORMULA OF DOUBLE DECLINING BALANCE METHOD
The formula for calculating annual depreciation according to DDB method is :-
DDB Depreciation = 2 X Cost of the asset X Depreciation rate
The following steps must be followed to calculate the depreciation :-
- Determine the asset’s opening book value, residual value and the useful life of the asset.
- Calculate the straight line depreciation rate .
Straight line depreciation rate= cost – expected residual value/expected useful life of asset
- Determine the double declining balance rate by multiplying the straight line depreciation rate by 2
- Apply the derived rate to the book value of the asset at the start of each period.
- Deduct the depreciation expense from the beginning value to calculate the ending period value
- Repeat the above steps till the salvage value is reached.
For Example – An Asset is purchased at a cost of Rs 1,00,000 having no salvage value and a useful life of 10 years. The depreciation lets suppose is 10% for straight line method so, with the double declining method the rate will become 20%.
Since there is no depreciation in the first year the depreciation will be calculated as Rs 1,00,000 x 10%=Rs 20,000. The book value now becomes Rs 1,00,000 – Rs 20,000= Rs 80,000 So, for the 2nd year depreciation by double declining method will become Rs 80,000 x 20%=Rs 16,000.
This process will be continued till the end of the useful life of the asset.
ADVANTAGES OF DOUBLE DECLINING DEPRECIATION METHOD
- The depreciation is charged at higher rates in the initial years as compared to the later years which helps the business in lowering its tax liability thereby saving the tax .
- The double-declining-balance method allocates depreciation expenses in a declining manner in later years and can help offset the increased maintenance costs with less depreciation expenses during the same periods.
- This method is recognized by the Income Tax authorities.
DISADVANTAGES OF DOUBLE DECLINING METHOD
- The determination of a suitable rate of depreciation is also difficult under this method as compared to the Fixed Installment method.
- The value of the asset cannot be brought down to zero under his method.
Thus, in simple words, a Double-Declining balance depreciation method is an accelerated depreciation method that can be used to depreciate the value of the asset over the useful life of the asset & is useful for deferring tax payments and maintain low profitability in the early years.