We can incorporate this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12. It is important to note that we apply the depreciation rate on the full cost rather than the depreciable cost (cost minus salvage value). The following section explains the step-by-step process for calculating the depreciation expense in the first year, mid-years, and the asset’s final year.

The Advantages of Using the Double Declining Balance Method

By prioritizing higher depreciation in the early years, it aligns financial records with real-world asset usage and delivers multiple benefits. 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 (which may be of use for deferring income taxes).

Analyze the Income Statement

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Calculator Instructions

• To introduce the concept of the units-of-activity method, let’s assume that a service business purchases unique equipment at a cost of $20,000.
• Any additional maintenance costs would be deductions from a company’s reported profits.
• The straight-line method provides a consistent depreciation expense over the asset’s useful life, simplifying budgeting and financial planning.
• To amplify this step, assume that a retailer had recorded depreciation on its fleet of delivery trucks up to December 31.
• To record the depreciation expense each year for this asset, we enter a journal entry that debits Depreciation Expense $4,000 and credits Accumulated Depreciation $4,000.

We should have an Ending Net Book Value equal to the Salvage Value of $2,000. With other assets, we may find we would be taking more depreciation than we should. In the last year, ignore the formula and take the amount of depreciation needed to have an ending Net Book Value equal to the Salvage Value.

Double Declining Balance Method Formula

• First, the straight-line depreciation rate is determined by dividing 100% by the asset’s useful life.
• In the final year, the asset will be further depreciated by $2000, ignoring the rate of depreciation.
• Continue this process each year until the book value reaches the salvage value or the end of the asset’s useful life.
• In the last line of the above depreciation schedule, you will note that the depreciation expense was adjusted downward so as not to depreciate the machine beyond its salvage value.
• This allows us to see both the truck’s original cost and the amount that has been depreciated since the time that the truck was put into service.

While the double declining balance method emphasizes rapid depreciation, the salvage value plays a role in ensuring total depreciation does not reduce the book value below this amount. When accountants use double declining appreciation, they track the accumulated depreciation—the total amount they’ve already appreciated—in their books, right beneath where the value of the asset is listed. If you’re calculating your own depreciation, you may want to do something similar, and include it as a note on your balance sheet. Suppose a company purchases a piece of machinery for $10,000, and the estimated useful life of this machinery is 5 years.

Processing

Also note that some calculators will reformat to accommodate the screen size as you make the calculator wider or narrower. If the calculator is narrow, columns of entry rows will be converted to a vertical entry form, whereas a wider calculator will display columns of entry rows, and the entry fields will be smaller in size … Choose your rounding preference for the depreciation schedule (if real estate cash flow applicable). Enter the purchase cost the property, not including the value of any land that came with it. Enter the name or description of the property if you would like it included in the depreciation schedule.

The total expense over the life of the asset will be the same under both approaches. Depreciation in the year of disposal if the asset is sold before its final year of useful life is therefore equal to Carrying Value × Depreciation% × Time Factor. Therefore, it is more suited to depreciating assets with a higher degree of wear and tear, usage, or loss of value earlier in their income summary lives. Instead of multiplying by our fixed rate, we’ll link the end-of-period balance in Year 5 to our salvage value assumption.