Accelerated Depreciation and the Double Declining Balance Method
A variety of "accelerated depreciation" methods have been devised to book relatively higher depreciation amounts earlier in the lives of assets and smaller amounts later. These methods are meant to more accurately reflect the actual declines in usefulness or values of fixed assets.
One of the most popular methods of accelerated depreciation is the "double declining balance" method. Under this method, the percentage of the asset's value that is depreciated in the first year is doubled. Then, in the second year, this same percentage is applied to the remaining balance to calculate depreciation, and so on.
Let's use the same example from the discussion on straight line depreciation. You buy a vehicle for $20,000. You believe that it has a useful life of five years and a salvage value of $5,000. Under straight line depreciation, you would depreciate the asset over five full years; therefore, the annual depreciation represents one fifth or twenty percent of the asset's useful life.
Under the double declining balance method, you would double this twenty percent amount to forty percent. The depreciation for year one under the double declining balance method would be $8,000 (or 40% of $20,000). It is important to note that the double declining balance method applies the year-one percentage to the full cost of the asset without deducting any salvage value.
The second year depreciation would be $4,800 or 40% X ($20,000-$8,000). The third year depreciation expense would be $2,200. Note that the year-three depreciation calculated by taking forty percent of the remaining balance of $7,200 ($20,000-$8,000-$4,800) would be $2,880. Remember, however, that the salvage value is $5,000. We can't depreciate any further than the depreciable basis of $15,000 ($20,000-$5,000). The remaining depreciation for year three is, therefore, $2,200 (or $7,200-$5,000).
Some accountants switch to straight line depreciation when depreciation under the double declining balance method becomes smaller than that under the straight line method.
One of the most popular methods of accelerated depreciation is the "double declining balance" method. Under this method, the percentage of the asset's value that is depreciated in the first year is doubled. Then, in the second year, this same percentage is applied to the remaining balance to calculate depreciation, and so on.
Let's use the same example from the discussion on straight line depreciation. You buy a vehicle for $20,000. You believe that it has a useful life of five years and a salvage value of $5,000. Under straight line depreciation, you would depreciate the asset over five full years; therefore, the annual depreciation represents one fifth or twenty percent of the asset's useful life.
Under the double declining balance method, you would double this twenty percent amount to forty percent. The depreciation for year one under the double declining balance method would be $8,000 (or 40% of $20,000). It is important to note that the double declining balance method applies the year-one percentage to the full cost of the asset without deducting any salvage value.
The second year depreciation would be $4,800 or 40% X ($20,000-$8,000). The third year depreciation expense would be $2,200. Note that the year-three depreciation calculated by taking forty percent of the remaining balance of $7,200 ($20,000-$8,000-$4,800) would be $2,880. Remember, however, that the salvage value is $5,000. We can't depreciate any further than the depreciable basis of $15,000 ($20,000-$5,000). The remaining depreciation for year three is, therefore, $2,200 (or $7,200-$5,000).
Some accountants switch to straight line depreciation when depreciation under the double declining balance method becomes smaller than that under the straight line method.
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