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But as time goes by, the fixed asset may experience problems due to wear and tear, which would result in repairs and maintenance costs. That’s why depreciation expense is lower in the later years because of the fixed asset’s decreased efficiency and high maintenance cost. If you file estimated quarterly taxes, you’re required to predict your income each year. Since the double declining balance method has you writing off a different amount each year, you may find yourself crunching more numbers to get the right amount.

Double-declining depreciation charges lesser depreciation in the later years of an asset’s life. Therefore, it is more suited to depreciating assets with a higher degree of wear and tear, usage, or loss of value earlier in their lives. Straight-line depreciation may be the right option for small organizations with straightforward accounting systems or businesses where the owner prepares and files the business’s tax return. Doing some market research, you find you can sell your five year old ice cream truck for about $12,000—that’s the salvage value. Under IRS rules, vehicles are depreciated over a 5 year recovery period.

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As a business owner, you need to know that the transition from one accounting method to another is inevitable. You should ask your accountant about their approach to calculating the value of depreciation for different assets. If you use the double-declining balance method, the book value of the assets will change every year. The changing values can affect your business forecasting function, and you might find it challenging to come to a fair prediction. The double-declining-balance (DDB) method, which is also referred to as the 200%-declining-balance method, is one of the accelerated methods of depreciation. DDB is an accelerated method because more depreciation expense is reported in the early years of an asset’s life and less depreciation expense in the later years.

So, if a company shells out $15,000 for a truck with a $5,000 salvage value and a useful life of five years, the annual straight-line depreciation expense equals $2,000 ($15,000 minus $5,000 divided by five). The DDB method contrasts sharply with the straight-line method, where the depreciation expense is evenly spread over the asset’s useful life. The choice between these methods depends on the nature of the asset and the company’s financial strategies. DDB is preferable for assets that lose their value quickly, while the straight-line method is more suited for assets with a steady rate of depreciation.

Double-Declining Balance Depreciation Method

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. Over the equipment’s useful life, the business estimates that the equipment will produce 5,000 valuable items. Assuming there is no salvage value for the equipment, the business will report $4 double declining balance method ($20,000/5,000 items) of depreciation expense for each item produced. If 80 items were produced during the first month of the equipment’s use, the depreciation expense for the month will be $320 (80 items X $4). If in the next month only 10 items are produced by the equipment, only $40 (10 items X $4) of depreciation will be reported.

• This approach ensures that depreciation expense is directly tied to an asset’s production or usage levels.
• In year 5, however, the balance would shift and the accelerated approach would have only $55,520 of depreciation, while the non-accelerated approach would have a higher number.
• Certain fixed assets are most useful during their initial years and then wane in productivity over time, so the asset’s utility is consumed at a more rapid rate during the earlier phases of its useful life.
• Now that we have a beginning value and DDB rate, we can fill up the 2022 depreciation expense column.
• In case of any confusion, you can refer to the step by step explanation of the process below.
• Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years–that is, $30,000 minus $3,000, divided by 10.
• In the first accounting year that the asset is used, the 20% will be multiplied times the asset’s cost since there is no accumulated depreciation.