Double Declining Depreciation Method
Under this method, the asset depreciates at a double rate. And the rate under this method is straight-line depreciation rate which we calculate by dividing 100% from the life of the asset. This double-declining depreciation calculator calculates the depreciation of the assets with a useful life equal to five years or less.
This method assumes that an asset is more productive in its initial years and slowly and steadily its productivity reduces. Therefore, the revenue generation will be more in the initial years, and to match the revenues, more depreciation is charged in those years.
This method is double of declining or reducing balance method and hence, generally also termed as 200% declining balance method. However, the asset will be depreciated up to its scrap value only.
The major benefit of using this method is to reduce tax liability. More revenues due to more production will get reduced by the amount of double depreciation. This will lower the net income on which tax is to be calculated. Also, it reduces the loss on disposal of the asset at the end of its because it will get depreciated at a double rate.
The formula for calculating double-declining depreciation is:
Double Declining Depreciation = 2 * Total Cost of the Asset * Straight Line Depreciation Rate
For calculating straight-line depreciation rate, consider the following formula:
Straight Line Depreciation Rate = 100% / Life of Asset
How to Calculate using Calculator?
This double-declining depreciation calculator will provide you the calculation of depreciation for the asset with a useful life of five years or less. Under this method, we multiply the straight-line depreciation rate by 2 to double the effect of depreciation. We simply have to insert the following details into the calculator to get the depreciation for different years upto five years.
Total Cost of the Asset
Enter the total cost of the asset that is to be capitalized. This is the cost at which the asset is recorded in the books of the company. It includes all the expenses incurred before the asset has been put to use. And, excludes the discount, if any.
The value at which we can sell or scrap the asset after its economic life gets over. The scrap value of an asset can be zero.
Life of Asset
The life of an asset means the number of years up to which the asset will run efficiently and would be able to generate revenue for the company.
Suppose that a company has purchased a machine worth $1,200,000 with an economic life of 5 years. The scrap value of the machine is $100,000.
The straight line depreciation rate = 100% / 5 = 20%
Double Declining Depreciation Rate = 2* Straight Line Depreciation Rate = 2*20% = 40%
The depreciation using double declining balance method is:
|Year||Opening Book Value||Depreciation||Closing Book Value||Rate of Depreciation|
The rate in the fifth year has decreased to 35.70% from 40% as the asset cannot be depreciated more than its scrap value. Or we can say this year’s depreciation will not exceed the residual value of the machine.
There are certain drawbacks of using this method. Charging more depreciation reduces the net income of the company which belongs to the shareholders. This ultimately reduces the per-share earnings. Also, lower profits will indicate that the company is not performing well.
Therefore, before selecting any method for calculating depreciation, one should evaluate all the pros and cons of all the methods.