Double Declining Balance Depreciation Method Explained
It is an accelerated depreciation method commonly used by businesses. It is applicable to the assets which are used for years and the usage declines with the passage of time. In this method, the book value of an asset is reduced (“written down”) by double the depreciation rate of the straight-line depreciation method.
Calculating the Double Declining Depreciation Method
The formula for calculating in this method is,
Depreciation for a period = 2 * straight-line depreciation percent * book value at the beginning of the period.
When a company buys an asset that will be used for a long time, they do not deduct the whole price as the expense in the purchasing year, rather they record it over several years. In accounting practices, the expenses are recorded against the revenue. As a company gains revenue from such an asset for many years, the expense is also recorded in that way. The double depreciation rate remains constant over the depreciation process. The same rate is applied to the reducing book value of the asset each depreciation period.
Example of the Double Declining Depreciation Method
For example, a business buys a machinery with $ 10,000 and the machinery is expected to last for 10 years. The salvage value of the machinery is 10% of the cost that is $1,000. In straight-line depreciation method the company would deduct [($10,000-$1,000)/10] = $900 per year. In Double declining balance method, the company would deduct 20% of $10,000 in the first year, 20% of $9,800 and so on.
This method is generally used for calculating the depreciation of the assets that lose its value quickly.
References for the Double Declining Depreciation Method
Double Declining Balance Depreciation Method
From Double–Declining–Balance to Sum-of-the-Years’-Digits Depreciation: An Optimum Switching Rule, Schwab, B., & Nicol, R. E. (1969). Accounting Review, 292-296. This article takes a look at a guideline that allows individuals to switch the method by which they depreciate their assets for tax reporting purposes. The authors explain the justifaction for such a switch, and analyze methods by which the best time for switching can be determined.
Capital Budgeting and the” Best” Tax Depreciation Method, Davidson, S., & Drake, D. F. (1961). The Journal of Business, 34(4), 442-452. This article offers an examination of the benefits of various methods of calculating depreciation. Written for both economists and accountants, the authors begin with an analysis of depreciation as a basis for discussion. From there, different ways to treat depreciation are described and discussed.
The measurement of depreciation in the US national income and product accounts, Fraumeni, B. (1997). SURVEY OF CURRENT BUSINESS-UNITED STATES DEPARTMENT OF COMMERCE, 77, 7-23. This 1997 article describes the basis for a new depreciation method adopted by the Bureau of Economic Analysis (BEA). The piece begins with a general discussion of depreciation followed by an examination of the BEA’s previous depreciation methods. The new method is analyzed empiricaly, and the article concludes with explicit depreciation rates for a variety of government assets.
Optimal tax depreciation, Wakeman, L. M. (1980). Journal of Accounting and Economics, 2(3), 213-237. This article provides a simple discussion of depreciation methods. Using a numerical simulation, the author presents a basic capital budgeting technique that can be used to find the best depreciation method for someone filing under the U.S. tax code. This analysis is also extended to find the optimal depreciation method under the Class Life Asset Depreciation Range System.
Accelerated depreciation and the allocation of income taxes, Davidson, S. (1958). Accounting Review, 173-180. This 1958 article confines itself to what it identifies as the most important question regarding inter-period allocation: The use of straight-line depreciation for financial reporting versus the use of accelerated depreciation for tax reporting. The author offers a critical take of previous articles arguing both for and against these approaches.
Economic depreciation and the taxation of structures in United States manufacturing industries: an empirical analysis, Hulten, C. R., & Wykoff, F. (1980). In The measurement of capital (pp. 83-120). University of Chicago Press. This article undertakes an empirical analysis of depreciation in regards to taxation. The authors state four objectives: To compare tax depreciation with economic depreciation estimates, to estimate the effect on asset values and tax liabilities, to construct capital stock estimates of certain structures, and to determine the rate of tax subsidy per capital dollar by industry grouping. Data derived from 16 classes of commercial and industrial structures are employed to help illustrate the figures while achieving the analysis objectives.
The” Best” Tax Depreciation Method-1964, Davidson, S., & Drake, D. F. (1964). The Journal of Business, 37(3), 258-260. This article builds on the authors’ previous work in regards to finding an optimal method for tax depreciation. Using the latest revisions to tax law (circa 1964), they outline a capital budgeting technique for a hypothetical firm.
Economic and tax depreciation of office buildings, Taubman, P., & Rasche, R. H. (1969). National Tax Journal, 22(3), 334-346. This article takes a closer look at methods and effects of depreciation, specifically as they apply to office buildings. The author offers a theoretical and mathematical approach to the valuation of these structures.
Accounting standards and value relevance of financial statements: An international analysis, Hung, M. (2000). Journal of accounting and economics, 30(3), 401-420. This study employs empirical data of 17,743 companies from 21 countries over a six-year period in the 1990s. The results show that the use of accrual accounting has negative effects on the value relevance for the financial statements of companies in countries with weak shareholder protection. The findings support the idea that shareholder protection improves the effectiveness of accrual accounting.
Economic analysis of power generation from floating solar chimney power plant, Zhou, X., Yang, J., Wang, F., & Xiao, B. (2009). Renewable and Sustainable Energy Reviews, 13(4), 736-749. This paper analyzes the economic performance of a floating solar chimney power plant (FSCPP). Cash flows are analyzed, as are the possible factors that influence cash flows, such as investment, operation and maintenance cost, life span, payback period, inflation rate, minimum attractive rate of return, non-returnable subsidy rate, interest rate of loans, sale price of electricity, and income tax rates. The findings show that a 100 MW FSCPP is more economic than many other plants with the same power capacity.
The New depreciation policy under the income Tax: an economic analysis, Brown, E. C. (1955). National Tax Journal, 8(1), 81-98. Depreciation continues to be a controversial topic, and this 1955 article offers an in-depth analysis of the current state of the policy as it is considered under income tax law. This analysis takes a look at various factors that determine how depreciation is applied.
Identifying Interfirm Total Cost Advantages for Supply Chain Competitivenes, Cavinato, J. L. (1991). International Journal of Purchasing and Materials Management, 27(4), 10-15.