How to Calculate Depreciation Using the Double Declining Balance Method

Hey there, welcome back to Accounting Stuff! In this video, I’ll show you how to calculate depreciation using the double declining balance method. Depreciation is the process of reducing the book value of a tangible fixed asset due to factors like use, wear and tear, the passing of time, or obsolescence. The double declining balance method is an accelerated variable cost depreciation method, where the expense is higher in the early years. In this video, we’ll use a laptop as an example to walk you through the three simple steps of applying the double declining balance method. By the end, you’ll have a clear understanding of how to calculate depreciation and apply this specific method.

To start, you’ll need to write down what you know about your asset and build a depreciation schedule. In the depreciation schedule, you’ll calculate the depreciation expense, accumulated depreciation, and book values for each accounting period. We’ll guide you through the process, providing clear explanations and examples along the way. So let’s dive right in and learn how to calculate depreciation using the double declining balance method!

How to Calculate Depreciation Using the Double Declining Balance Method

Step 1: Write Down What You Know

When using the double declining balance method to calculate depreciation, there are several key pieces of information you need to identify. First, you must clearly identify the asset that is being depreciated. In this example, we are using a laptop as the asset.

Next, specify that the depreciation method being used is the double declining balance method. This method is an accelerated variable cost depreciation method, meaning that the depreciation expense is higher in the early years of the asset’s useful life.

Determine the asset cost, which refers to the initial amount paid for the asset. In this case, the laptop costs $2,500.

The useful life of the asset is the estimated number of years that the asset will be useful before it becomes obsolete or no longer functional. For the laptop, the useful life is determined to be five years.

Lastly, determine the residual value of the asset. The residual value is the estimated value of the asset at the end of its useful life. In this example, we can ignore the residual value.

Step 2: Build a Depreciation Schedule

To calculate depreciation using the double declining balance method, it is helpful to create a depreciation schedule. This schedule consists of a table with five columns: Year, Opening Book Value, Depreciation Expense, Accumulated Depreciation, and Closing Book Value.

In the Year column, list each accounting period for the useful life of the asset (e.g., Year 1, Year 2, Year 3, etc.).

Step 3: Calculate the Depreciation Expense, Accumulated Depreciation, and Book Values

Now, we can begin calculating the depreciation expense, accumulated depreciation, and book values for each accounting year.

Year 1:

Calculate the opening book value, which is the carrying amount of the asset at the start of the year. In this example, the opening book value is the same as the asset cost, which is $2,500.

Next, calculate the depreciation expense using the double declining balance method. The depreciation expense is equal to 2 multiplied by the straight-line depreciation rate, which is determined by dividing 1 by the useful life of the asset. In this case, the straight-line depreciation rate is 1/5 or 20%. Multiplying 20% by the opening book value of $2,500 gives a depreciation expense of $500.

Calculate the accumulated depreciation, which is the sum of all depreciation expenses incurred to date. In Year 1, the accumulated depreciation is equal to the depreciation expense, which is $500.

Finally, calculate the closing book value, which is the net asset amount in the balance sheet at the end of the year. The closing book value is equal to the opening book value minus the depreciation expense. In this case, the closing book value is $2,500 – $500 = $2,000.

Repeat these calculations for each subsequent year (Year 2, Year 3, Year 4, and Year 5).

Year 2:

To calculate the opening book value for Year 2, use the closing book value from the previous year. In this case, the opening book value for Year 2 is $2,000.

Calculate the depreciation expense using the same method as in Year 1, but using the new opening book value. In this case, the depreciation expense for Year 2 is 2 multiplied by the straight-line depreciation rate multiplied by the opening book value of $2,000, which equals $400.

Calculate the accumulated depreciation, which is the sum of all depreciation expenses incurred to date. In Year 2, the accumulated depreciation is equal to the sum of the depreciation expense from Year 1 and Year 2, which is $500 + $400 = $900.

Calculate the closing book value by subtracting the depreciation expense from the opening book value. In this case, the closing book value for Year 2 is $2,000 – $400 = $1,600.

Year 3, Year 4, and Year 5:

Follow the same steps as above to calculate the opening book value, depreciation expense, accumulated depreciation, and closing book value for each subsequent year. The calculations will continue to use the closing book value from the previous year as the new opening book value.

By the end of Year 5, you will have the final closing book value, which represents the net asset amount remaining after five years of depreciation.

Conclusion

The double declining balance method is an accelerated variable cost depreciation method that allows you to calculate the depreciation expense, accumulated depreciation, and book values of an asset over its useful life. By following the steps outlined in this article, you can effectively use the double declining balance method to calculate depreciation for your tangible fixed assets.