Assets don’t always lose value at a steady, predictable pace. In reality, some assets, like vehicles, machinery, and electronics, depreciate much faster during their early years. That’s where the double declining balance method comes in.
This accelerated depreciation method helps businesses recognize higher expenses upfront. Thus, it will help match the asset’s actual usage and declining value. It’s especially useful for companies investing in equipment that quickly becomes outdated or wears out.
In this article, you’ll learn how the double declining balance method works, when to apply it, and how to calculate it easily. Whether you’re new to depreciation methods or need a quick refresher, this guide will walk you through everything step by step.
Key Takeaways
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Table of Contents
What is the Double Declining Balance Method?
The double-declining balance (DDB) method, also called the reducing balance method, is a way businesses calculate how quickly a long-term asset loses value.
Unlike the straight-line method, which spreads depreciation evenly over an asset’s useful life, DDB accelerates this process by recording higher expenses in the early years. This method depreciates assets at twice the straight-line rate, which leads to faster value reduction upfront.
In practice, the depreciation rate in the declining balance method can be set at 150%, 200% (double), or 250% of the straight-line rate. When it’s set at double, the method becomes the DDB method.
The chosen rate stays constant but is always applied to the asset’s declining book value, meaning depreciation expenses shrink over time as the asset’s value decreases.
How Double Declining Balance Method Works
When the depreciation rate is set at double the straight-line rate, this method becomes the double-declining balance (DDB) method. Using this approach, the depreciation rate stays constant, but it’s always applied to the asset’s remaining book value, which decreases over time.
Because of this, the depreciation expense is highest in the first year and gradually decreases each year as the asset’s book value drops. Eventually, the asset’s value on the books is reduced to its salvage value: the estimated worth of the asset at the end of its useful life.
In some cases, the final depreciation amount is adjusted to ensure the remaining value doesn’t fall below the estimated salvage value.
Companies follow similar accounting standards based on the Philippine Financial Reporting Standards (PFRS), which align closely with international accounting principles. These standards ensure that expenses are recorded in the same period as the revenues they help generate.
So, if a business purchases a costly asset like machinery or equipment, it doesn’t record the full expense immediately. Instead, it spreads out the expense over the years the asset is expected to provide value.
This approach is also closely tied to inventory accounting, especially when managing high-value assets and goods.
Double Declining Method vs. Straight Line Method
Here’s the difference between double declining balance method and straight line method:
- Straight-Line Method: This is the most commonly used depreciation approach. It spreads the cost of an asset evenly over its useful life. For example, if a company purchases an asset for ₱100 million with a useful life of 10 years and no salvage value, it will record a depreciation expense of ₱10 million per year.
- Double Declining Balance Method: In contrast, this method records higher depreciation expenses upfront, which gradually decrease over time.
For publicly listed companies, this matters because investors often view lower early profits negatively. Since these companies aim to maintain strong financial performance and support their stock prices, many prefer the smoother, more gradual expense recognition offered by the straight-line method.
However, it’s important to note that while DDB starts with higher expenses, the depreciation amount naturally decreases over time as the asset’s book value declines.
Even if the double declining balance (DDB) method better reflects how certain assets quickly lose value, the straight-line depreciation method remains more widely used in practice.
One reason is that accelerated depreciation methods like DDB result in higher depreciation expenses in the early years, which directly lowers profit margins during those initial periods. This can make a company’s financial performance appear weaker in the short term.
How to Calculate Double Declining Balance Method
Calculating depreciation using the double declining balance (DDB) method is a simple, step-by-step process:
Step 1: Find the Straight-Line Depreciation Expense
Start by calculating the annual depreciation expense using the straight-line method, based on the useful life of assets. Subtract the asset’s salvage value from its purchase cost, then divide the result by its useful life.
Step 2: Calculate the Straight-Line Depreciation Rate
Next, determine the straight-line depreciation rate by dividing the annual depreciation expense from Step 1 by the asset’s purchase cost.
Step 3: Determine the Double Declining Depreciation Rate
Multiply the straight-line depreciation rate by 2 to find the double declining depreciation rate.
Step 4: Calculate the Annual Depreciation Expense Using DDB
Apply the double declining rate to the asset’s beginning book value for each year. In the first year, this is the original purchase cost. In later years, it’s the remaining book value after previous depreciation.
Formula of Double Declining Balance Method
Where:
- SLDP = Straight-Line Depreciation Percent
- BV = Book Value at the Beginning of the Period
Quick Example:
- Asset Cost = ₱100,000
- Useful Life = 5 years → SLDP = 20%
- DDB Rate = 2 × 20% = 40%
Year 1 Depreciation:
So, you’d record ₱40,000 depreciation in Year 1.
Example of Double Declining Balance Method
As a simple example, imagine a small business in the Philippines purchasing a ₱300,000 delivery motorcycle, expected to last for 5 years. By the end of 5 years, it’s estimated to have a ₱30,000 salvage value.
Using the straight-line depreciation method, the company would record a depreciation expense of ₱54,000 per year, calculated as (₱300,000 – ₱30,000) divided by 5 years.
Now, applying the double-declining balance method, the company first calculates the straight-line depreciation rate as 1 ÷ 5 years = 20%. Then, it doubles the rate to 40% for the DDB method.
- Year 1: 40% of ₱300,000 = ₱120,000 depreciation
Book value at end of year: ₱300,000 – ₱120,000 = ₱180,000 - Year 2: 40% of ₱180,000 = ₱72,000 depreciation
Book value at end of year: ₱180,000 – ₱72,000 = ₱108,000 - Year 3: 40% of ₱108,000 = ₱43,200 depreciation
Book value at end of year: ₱108,000 – ₱43,200 = ₱64,800 - Year 4: 40% of ₱64,800 = ₱25,920 depreciation
Book value at end of year: ₱64,800 – ₱25,920 = ₱38,880 - Year 5: Since the book value can’t go below the salvage value of ₱30,000, the depreciation expense is limited to ₱8,880. Book value at end of year: ₱30,000 (salvage value reached)
The calculation is rather simple, but when there are numerous active assets in a company, the accountants might feel overwhelmed to track them all. So, they use tools like accounting software to help them track their every asset. Click here to discover the pricing plans!
Drawbacks of Double Declining Balance Method
Like most financial strategies, the double declining balance method also has its drawbacks.
- It involves more complex calculations: Depreciating assets using this method isn’t as straightforward as the straight-line approach. If you’re unfamiliar with it, you might end up spending more time doing calculations—or needing an accountant’s help to avoid costly errors.
- It makes income forecasting trickier: For businesses that make quarterly tax payments or prepare income projections, using DDB can complicate things. Because depreciation expenses change every year, predicting profits and cash flow becomes harder, requiring extra effort to adjust your estimates correctly.
- You might regret accelerating expenses later on: While recording higher depreciation early on can reduce taxes upfront, it leaves fewer deductions for the following years. If your business faces slower sales or rising expenses later, you might wish you’d chosen the steadier straight-line method instead.
In short, while DDB offers upfront tax benefits, it requires careful planning to avoid future financial strain.
Calculate Balance Methods Easily with HashMicro Accounting Software
If crunching numbers for DDB sounds like a headache, you’re not alone. That’s why tools like HashMicro Accounting Software handle the heavy lifting for you. Just input your asset details, and it automatically calculates depreciation, even for tricky methods like DDB.
You also get instant reports, so you’ll always know how your assets affect your profits without drowning in spreadsheets. Furthermore, HashMicro also provides a free demo and consultation with their expert team without credit card or any confidential information needed.
Beyond just calculating double declining balance method, HashMicro Accounting Software is equipped with these features:
- Asset Management with Revaluation and 3 Depreciation Methods: Easily manage assets and calculate depreciation using methods like straight-line, sum-of-years, and DDB—all automated within the system.
- Commercial and Fiscal Asset Tracking: Keep track of asset values for both business operations and tax reporting, helping you stay compliant without extra manual work.
- Comprehensive Financial Reporting: Generate detailed financial reports anytime, so you always understand how depreciation impacts your bottom line.
- Complete Financial Statements with Period Comparison (GL, TB, P&L, BS): Quickly compare financial performance across different periods to see how asset depreciation affects profits over time.
- Multi-Level Analytical Reports (by Project, Branch, etc.): Analyze depreciation effects across specific branches or projects, helping you make smarter business decisions.
- Easy Bank Statement Reconciliation with Automatic Matching: Save time by automatically matching transactions and simplifying your bank reconciliation process.
- Online Payment and E-Invoice with Auto Customer Statement Follow-Up: Speed up payments and collections with online invoicing and automated reminders through email or WhatsApp.
Conclusion
The double declining balance method helps businesses reduce asset values faster, resulting in higher initial depreciation expenses. While effective for certain assets, this method requires careful planning to avoid future financial reporting challenges.
Instead of stressing over complex calculations, let HashMicro Accounting Software handle your depreciation tasks with ease. Automate asset management, generate instant financial reports, and track depreciation without drowning in endless spreadsheets.
With HashMicro, you also enjoy a free demo and expert consultation, no credit card or commitments required. Experience how effortless managing finances can be with a powerful, reliable, and feature-rich accounting solution. Try the free demo now!
FAQ on Double Declining Balance Method
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What types of assets are best suited for the double declining balance method?
DDB is ideal for assets that lose value rapidly in their early years, such as vehicles, computers, and specialized machinery, as it aligns depreciation with the asset’s usage pattern .
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How does the double declining balance method impact taxes?
By front-loading depreciation expenses, DDB reduces taxable income more in the early years of an asset’s life, potentially lowering tax liabilities during those periods
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Are there limitations to using the double declining balance method?
DDB can complicate income forecasting due to varying depreciation expenses and may not be suitable for assets with uniform usage over time
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Can a company switch from double declining balance to straight-line depreciation?
Yes, it’s common to switch to straight-line depreciation when it yields a higher expense than DDB, ensuring the asset is fully depreciated over its useful life
