Declining-Balance Method

 The declining balance method  is also known as declining balance method depreciation method provides for higher depreciation charges in the earlier years of an asset’s life than does the straight-line method.  The declining balance method involves multiplying a fixed rate or percentage, by a decreasing book value. This rate is a multiple of the straight-line rate. Typically, it is twice the straight-line rate, but it also can be 175,150, or 125 percent of the straight-line rate.  Declining balance method differs from the other depreciation methods in two respects: (1) The initial computation ignores the asset’s salvage value, and (2) a constant depreciation rate is multiplied by a decreasing book value. The residual value is not ignored completely because the depreciation taken during the asset’s life cannot reduce the asset’s book value below the estimated salvage value.

Double declining balance (DDB) rate is twice the straight-line rate computed as follows:

                               1
                    _________________x 2 = DDB rate
                     Estimated life (Years)

This rate is multiplied times of book value in the starting of every year (cost- accumulated depreciation) to compute the annual depreciation expense for the year. If the 150 % declining balance were being used instead, the 2 in the rate formula would be replaced by 1.5 and so on for any other percentages.

To illustrate the depreciation calculation for the van using the 200 % (or double) DDB method is:

Based on this information, the formula for DDB depreciation could be expressed as (straight line rate x 2) x (cost – accumulated depreciation) = current year’s depreciation expense.  When you calculate that book value of the van at the end of year 4 is 2,000 its salvage value.

Questionnaire:

• What is declining balance method?
• What is double declining method?