How to Use the Double Declining Balance Method of Depreciation
One of the basic principles of accrual accounting is to match expenses to the period in which they are used. In the case of many fixed assets, they are used over many periods, so their value must be expensed accordingly over those periods. Fixed assets can include any tangible asset, from automobiles to factories and furniture.
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Instructions
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1
Determine the jurisdiction you will be following. It may be U.S. GAAP, U.S. Tax, IFRS or another system of accounting. The particular jurisdiction will affect the method by which you depreciate the asset, and the number of periods you may do so. In the following example, we will be depreciating office furniture under U.S. Tax, which has a defined useful life of five years. In the example, we will use the straight-line method.
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2
Determine the value of the asset. Depending on the type of asset and the accounting method, there are many ways to do this. If the asset can be easily valued through a third party, that should be used. If the asset is similar in value to another that was recently purchased or sold, that value may be used. In addition, any costs associated with bringing the asset into use, or fees associated with acquiring the asset (such as legal costs or permits), should be included. For the purpose of the example, the cost to bring the swimming pool into service is $1 million.
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3
Estimate the salvage value. This is the value for which the asset can be sold after its useful life. For example, an automobile may be able to be sold to a scrap yard for parts. In practice, salvage values are generally zero.
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4
Determine the rate of depreciation. To do this find the straight line depreciation factor, which is1 divided by the useful life. So in the office furniture example its 0.2.
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5
Find the annual depreciation rate. To do this multiply the depreciation factor from Step 4 by the method factor. If you’re using double declining balance it is 2, if you’re using triple declining it is 3 and so on. In the example it is 2, so the annual deprecation rate is 0.4, or 40 percent.
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6
Calculate the first year’s depreciation expense. It will be the depreciation rate from Step 5 times the value of the asset, which in the example is $1 million. Depreciation Expense for year one is $1 million time 40 percent, which equals $400,000. The book value at year end will be $600,000 ($1,000,000 minus $400,000.)
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7
Know that the depreciation for subsequent years will be the book value, which in the beginning of year 2 was $600,000 (from Step 6) multiplied by the depreciation rate from step 5, 40 percent. The product of 40 percent times $600,000 is $240,000 and the resulting book value at year end will be $360,000.
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8
Follow Step 8 until the useful life has expired in which case the asset should be written off.
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