Declining balance depreciation methods – advantages and disadvantages
What is double (200%) declining balance method?
Double (200%) declining balance is one of the accelerated depreciation accounting methods that takes more depreciation in earlier years of a long-term depreciable assets’ useful life compare to the straight line depreciation method. Accelerated depreciation methods are those that faster depreciate the asset and make the amount of depreciation expense decline each period of the property’s useful life. The 200% declining balance method is the most commonly used, but other less than double methods are acceptable. This method is recommended for those assets that have higher maintenance cost in later years of its service life.
To illustrate how an entity uses this accounting method, let’s assume that the company bought a piece of equipment for $20,000 and it doesn’t require any additional cost to put it to work. It was estimated that the asset will have approximately $4,000 of salvage value at the end of its four year service life.
To compute a depreciation rate by using the double (200%) declining balance method the entity will use the following formula:
Double declining balance (DDB) rate = 2 x Straight line rate.
In other words, the double declining balance rate equals twice the straight line depreciation method’s rate. So, in order to find the double declining rate they need to multiply 2 by 1/4 (or 2 x 25%) where denominator of the 1/4 fraction reflect the numbers of years the equipment in use.
Note that salvage value should be ignored initially when performing the double declining balance method calculation.
|Years||Initial cost||Depreciation base||Depreciation expense||Accumulated depreciation||Carrying value|
|A||B||C||D||E||F = B - E|
|1||$20,000||$20,000 x 0.50 =||$10,000||$10,000||(D1)||$10,000|
|2||$20,000||$10,000 x 0.50 =||$5,000||$15,000||(D1 + D2)||$5,000|
|3||$20,000||$5,000 - $4,000 =||$1,000||$16,000*||(D1 + D2 + D3)||$4,000|
|4||$20,000||$4,000 - $4,000 =||$0||$16,000||(D1 + D2 + D3 +D4)||$4,000|
* When accumulated depreciation will reach the amount of the depreciable base (in the example $16,000), then double declining rate should no longer be applied. The depreciation expense for the period will be anything what is left (if any).
What is 150% declining balance method?
The 150% declining balance method is almost the same as double declining one. It is also one of the accelerated depreciation accounting methods that takes more depreciation at the beginning of a long-term depreciable assets’ service life.
To calculate the depreciation rate for 150% declining balance method you need to perform everything like for double declining balance method, but instead 2 x Straight line rate use 1.5 x Straight line rate
150% declining balance rate = Straight line rate x 1.5 (or 150%)
Advantages of declining depreciation balance method
- Declining balance depreciation methods better match costs to revenues because it takes more depreciation in the early years of an assets’ useful life compare to the straight line depreciation method (according to what the matching rule says that expenses must be matched up against the revenues that those expenses helped to generate)
- Reflect better the difference in usage of an asset from one period to the other compare to the straight line depreciation method
Disadvantages of declining depreciation balance method
- Might be harder to compute compare to the straight line depreciation method
- They have declining amounts of depreciation expense which creates greater disparity between the costs
- Decreasing depreciation expense and increasing maintenance of an asset might smooth the income