Double Declining Balance Depreciation Method (DDB)
Candlefocus EditorThe DDB method is often used for long-term assets such as machinery and equipment. Since these assets are expected to lose significant value during their useful life, larger depreciation charges during the earlier years result in a lower taxable income. The double-declining balance assumes that assets lose their value in the same proportion each year, though some assets may lose more of their value in the first few years. The double-declining balance method is at least twice as fast as the straight-line approach, which assumes assets decline in value evenly throughout their useful lives.
The DDB method is calculated by multiplying the asset’s book value by a depreciation rate that is twice the straight-line rate. For example, if an asset has a depreciation rate of 10%, the double-declining balance method would utilize a rate of 20%. For example, if the book value of an asset is $10,000, the depreciation expense would be $2,000 each year (20% x $10,000). This depreciation expense would be applied towards the asset until its book value reaches zero.
The DDB method can be calculated in an automated way in most accounting software. It is important for the business to recognize that there is an impact on both profits and taxes associated with these accelerated depreciation methods, as well as the need to plan for the future life of the asset and its ultimate disposal.
Generally, the DDB method is an effective way for companies to benefit from a tax break and to adjust their overall tax strategy. By taking advantage of the DDB method, companies can lower their taxable income and pay lower taxes. The Disadvantages of the method include possible issues with matching expenses to revenue and the lack of available cash since larger depreciation charges decrease profits. As a result, it is important to review the asset’s useful life and compare it to the depreciation rates of the DDB and the straight-line methods to make an informed decision.