What Is the Double Declining Balance (DDB) Method of Depreciation?
Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content.
Eric is a staff writer at Fit Small Business and CPA focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone.
This article is part of a larger series on Bookkeeping.
The double declining balance (DDB) method is one of the four depreciation methods used in fixed asset accounting. It’s an accelerated method because it doesn’t report a fixed depreciation expense throughout the useful life of the fixed asset.
When To Use the Double Declining Balance Method
- Fixed assets that rapidly decline in value due to daily wear and tear: Fixed assets exposed to the elements, like vehicles, are susceptible to damage and decrease in efficiency. It’s expected that newly acquired assets perform at their paramount performance in the early years and decline gradually in later years.
- Fixed assets susceptible to obsolescence due to technological advancements: Machines, computing devices, and specialized equipment are subject to the risk of obsolescence. Today’s newest technology can easily be replaced with better and more advanced technology, and charging higher depreciation in earlier years reflects the asset’s usefulness over time.
- Fixed assets used in large-scale manufacturing and construction: Manufacturing and construction fixed assets are subject to extreme wear and tear due to heavy use and large processing capacities. As companies use these fixed assets, their efficiency will decline over time.
- Calculating depreciation for income tax purposes: The DDB method is the default method used for calculating MACRS depreciation for assets with a class life of 20 years or less. While you can elect straight-line depreciation, you generally want to use DDB as it results in a larger tax deduction.
Pros & Cons of the Double Declining Balance Method
| PROS | CONS |
|---|---|
| Larger depreciation in earlier years matches usage and efficiency | Requires complex calculations and tracking for annual depreciation adjustments |
| Lower depreciation charge in the later years matches higher maintenance and repair costs in later years | Substantially decreases net income in earlier years |
| Allows for reduced tax obligations in earlier years | Ignores the salvage value in computing depreciation in the early years of the asset |
How To Calculate Double Declining Balance Depreciation
Start by computing the DDB rate, which remains constant throughout the useful life of the fixed asset. However, depreciation expense in the succeeding years declines because we multiply the DDB rate by the undepreciated basis, or book value, of the asset. Read on for our step-by-step guide.
In illustrating how the DDB method works, we’ll use this depreciation schedule:
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
Step 1: Compute the Double Declining Rate
The double declining rate is twice the straight-line rate. Let’s take a look at the straight-line rate formula:
| Straight-line Rate | = |
1Useful Life |
In the formula, the useful life is an accounting estimate of the number of years a fixed asset will be used for operations. Since our DDB rate is twice the straight-line rate, our formula for the DDB rate would be:
| Straight-line Rate | = |
1Useful Life |
x 200% |
Step 2: Compute the Current Year Depreciation Expense
The current year depreciation is the portion of a fixed asset’s cost that we deduct against current year profit and loss. The accounting concept behind depreciation is that an asset produces revenue over an estimated number of years; therefore, the cost of the asset should be deducted over those same estimated years.
Current Year Depreciation Expense = Beginning Book Value x DDB Rate
The beginning book value is the cost of the fixed asset less any depreciation claimed in prior periods. For the first year, book value will equal cost. Under the DDB method, we don’t consider the salvage value in computing annual depreciation charges. Instead, we simply keep deducting depreciation until we reach the salvage value.
Step 3: Compute the Ending Book Value
The ending book value is the beginning book value less current year depreciation. Remember that when we roll forward the ending book value to the next accounting period, it becomes the beginning book value.
Repeat steps 2 and 3 until the ending book value is less than the salvage value. Recompute depreciation expense for that year by moving to step 4.
Step 4: Compute the Final Year Depreciation Expense
If the beginning book value is equal (or almost equal) with the salvage value, don’t apply the DDB rate. Instead, compute the difference between the beginning book value and salvage value to compute the depreciation expense.
Double Declining Balance Method Example
Let’s illustrate in detail how the DDB method works. Let’s assume that FitBuilders, a fictitious construction company, purchased a fixed asset worth $12,500 on January 1, 2022. The company estimates that its useful life will be five years and its salvage value at the end of its useful life would be $1,250.
Before we start computing our depreciation estimates, let’s first grab our depreciation schedule provided earlier:
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Let’s create five rows below our headings and enter the year per row. Since our useful life is five years, indicate years 2022 to 2026 in each row.
Step 1: Compute the Double Declining Rate
Let’s use the formula we discussed earlier. Our DDB rate is twice the straight-line rate.
DDB rate = (1 ÷ 5 years) x 200% = 40%
Let’s enter the DDB rate in the first four years only because we won’t use it in the last year. We can also enter our beginning book value as of 2022.
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | $ 12,500 | 40% | ||
2023 | 40% | |||
2024 | 40% | |||
2025 | 40% | |||
2026 | ||||
Step 2: Compute Current Year Depreciation Expense
Now that we have a beginning value and DDB rate, we can fill up the 2022 depreciation expense column.
Current Year Depreciation Expense = $12,500 x 40% = $5,000
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | $ 12,500 | 40% | $ 5,000 | |
Step 3: Compute the Ending Book Value
Our ending book value is the beginning book value less depreciation expense. It’s also our roll-forward amount in the next period.
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | $ 12,500 | 40% | $ 5,000 | $ 7,500 |
2023 | 7,500 | |||
The ending book value in 2022 is $7,500 (12,500 – 5,000). When making this schedule, double-check the accuracy of your computations because if the ending book value of the previous year is wrong, all succeeding book values, depreciation expenses, and accumulated depreciation will be incorrect as well.
Step 4: Compute Final Year Depreciation Expense
Let’s complete our depreciation schedule until 2025 before we complete our final year depreciation.
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | $ 12,500 | 40% | $ 5,000 | $ 7,500 |
2023 | 7,500 | 40% | 3,000 | 4,500 |
2024 | 4,500 | 40% | 1,800 | 2,700 |
2025 | 2,700 | 40% | 1,080 | 1,620 |
2026 | 1,620 | 1,250 | ||
FitBuilders estimates that the residual or salvage value at the end of the fixed asset’s life is $1,250. That’s why we placed that amount in the Ending Book Value column. Since we already have an ending book value, let’s squeeze in the 2026 depreciation expense by deducting $1,250 from $1,620. Our depreciation expense in the final year is $370.
DEPRECIATION SCHEDULE - DOUBLE DECLINING BALANCE METHOD | ||||
|---|---|---|---|---|
Year | Beginning Book Value | Depreciation Rate | Depreciation Expense | Ending Book Value |
2022 | $ 12,500 | 40% | $ 5,000 | $ 7,500 |
2023 | 7,500 | 40% | 3,000 | 4,500 |
2024 | 4,500 | 40% | 1,800 | 2,700 |
2025 | 2,700 | 40% | 1,080 | 1,620 |
2026 | 1,620 | 370 | 1,250 | |
Bottom Line
The double declining balance method of depreciation reports higher depreciation charges in earlier years than in later years. The higher depreciation in earlier years matches the fixed asset’s ability to perform at optimum efficiency, while lower depreciation in later years matches higher maintenance costs. However, computing the double declining depreciation is very systematic. It’s ideal to have an accounting software program that can calculate depreciation automatically.
