The double declining method of depreciation formula is a popular method used to calculate the depreciation expense of an asset over its useful life. This method allows businesses to recognize a higher depreciation expense in the earlier years of an asset's life, reflecting the fact that most assets tend to lose their value more rapidly in the beginning.
(Image: https://imgv2-2-f.scribdassets.com/img/document/50036734/original/0cb73c1f07/1717044387?v\u003d1)The formula for the double declining method of depreciation is as follows:
(Image: https://www.wallstreetmojo.com/wp-content/uploads/2022/08/4.jpg)Depreciation Expense = (Book Value at Beginning of Year) x (Depreciation Rate)
The book value at the beginning of the year refers to the asset's original cost minus the accumulated depreciation up to that point. The depreciation rate is typically twice the straight-line depreciation rate, which is calculated by dividing 100% by the asset's useful life.
To illustrate the double declining method of depreciation, let's assume a company purchases a machine for $10,000 with an estimated useful life of 5 years and no salvage value. The straight-line depreciation for this machine would be $2,000 per year ($10,000 divided by 5 years).
Using the double declining method, the depreciation rate would be 40% (twice the 20% straight-line rate). In the first year, the depreciation expense would be $4,000 ($10,000 x 40%). This amount is then subtracted from the machine's original cost to obtain the book value at the beginning of the second year, which is $6,000 ($10,000 - $4,000).
In the second year, the depreciation expense would be $2,400 ($6,000 x 40%), resulting in a book value of $3,600 ($6,000 - $2,400) at the beginning of the third year. This process continues until the book value reaches zero or the asset's salvage value.
(Image: https://img.yumpu.com/42456677/1/500x640/uscis-memo-the-adjudication-of-applications-and-petitions-asista.jpg)By utilizing the double declining method of depreciation, businesses can allocate a higher depreciation expense in the early years of an asset's life, which aligns with the asset's actual loss of value. This approach is particularly useful for assets that are expected to become obsolete quickly or have higher maintenance and repair costs as they age.
However, it's important to note that the double declining method may result in a higher depreciation expense compared to the straight-line method in the earlier years. This can have a negative impact on a company's net income and taxable income during those periods. Therefore, businesses should consider their specific financial and tax situations before deciding to use this method.
In conclusion, the double declining method of depreciation formula is a useful tool for businesses to accurately allocate the depreciation expense of an asset over its useful life. While it front-loads the depreciation in the early years, reflecting the asset's actual loss of value, it's essential for companies to evaluate the financial and tax implications of using this method before implementing it.