DOUBLE DECLINING METHOD OF DEPRECIATION – MEANING, EXAMPLE, ADVANTAGES AND DISADVANTAGES

The double declining method of depreciation is an accelerated method of depreciation where an asset depreciates at a rate that is twice as fast as straight-line depreciation.

The double declining method of depreciation is a combination of straight-line depreciation and reducing balance depreciation.

The double declining method of depreciation is similar to straight-line depreciation in that it charges a fixed rate of depreciation. However, the rate used is twice that of straight line depreciation

It is also similar to the reducing balance method because depreciation is charged on the book value of an asset at the beginning of the year.

This method of depreciation is most suitable for assets whose value corrodes quickly.

The double declining balance depreciation is calculated as follows :

$$DBBD=\frac{2}{UY}×BV$$

Where UY is the number of useful year's.

BV is the book value of the asset at the beginning of the period.

Example

A company bought equipment for N100,000. The equipment has an estimated useful life of 5 years and a scrap value of N10,000.

Calculate the depreciation charges for each year.

Year Book value (year start)DepreciationAccumulated depreciation Book value (year-end)
Year 1 N100,000N40,000N40,000N60,000
Year 2 N60,000N24,000N64,000N36,000
Year 3 N36,000N14,400N78,400N21,600
Year 4 N21,600N8,640N87,040N12,960
Year 5 N12,960N2960N90,000N10,000

Analysis

Earlier, I told you that a double declining balance is calculated as:

$DDBB=\frac{2}{UY}×BV$

The equipment in this case has a five-year useful year.

Hence, for the first year, 

$DBBD_1=\frac{2}{5}×N100,000=N40,000$

For the second year, the net book value is 100,000-40,000 or N60,000

$DBBB_2=\frac{2}{5}×N60,000=N24,000$

For the third year, the net book value is 100,000-64,000 or N36,000

$DBBD_3=\frac{2}{5}×N36,000=N14,400$

For the fourth year, the net book value is 100,000-78,400 or N21,600

$DBBD_4=\frac{2}{5}×N21,600=N8640$

For the fifth year, the net book value is 100,000-78,400 of 12,960

$DBBD_5=\frac{2}{5}×N12,960=N5184$.

However, as an asset should not be depreciated past its scrap value, we only report N2,960 for the last year

Advantages Of Double Declining Method Of Depreciation

1. It acts as a tax shield: A firm can reduce its tax liability by using the double declining method of depreciation.

In the earlier years of an asset, the depreciation charges of double declining balance depreciation are usually greater than that of the latter.

This means that a company may pay less tax in the early years of the asset and more tax in the latter years of the asset.

2. Reduce asset's retirement loss:  If the asset is retired from use earlier than anticipated due to unanticipated obsolescence, the firm will suffer minimum loss upon disposal a large part of the asset has already been depreciated, leaving only a small fraction of the asset for depreciation in the asset's latter year.

3. Offsets maintenance costs: Assets often require more maintenance as they age than they do when they are new.

The depreciation charge for a double declining balance is usually high in its early life and low in the latter life of an asset.

The low maintenance cost in the early years of an asset will be offset by high depreciation charges and the high maintenance cost in the later years of an asset will be offset by low depreciation charges

4. Suitable for assets that lose value quickly: Double declining balance of depreciation is highly suitable for assets that lose their value faster in the early years of usage.

An example of such assets is a motor vehicle

Disadvantages Of Double Declining Balance Method Of Depreciation

1. High cost of depreciation: Double declining balance depreciation is an accelerated method of depreciation, which means more depreciation charges are charged in the early years of an asset.

A high depreciation could increase the cost of production for a company, and would adversely hurt a company operating in a competitive market.

2. It can lower profit: Depreciation is an expense that lowers profit.

Under declining balance depreciation, significant depreciation expense is incurred in the initial years of asset usage, reducing profits in those initial years of use

3. Difficult to calculate: The double declining balance method of depreciation is more difficult to calculate than straight-line line depreciation.

It is not as straightforward as the traditional straight-line method of deep depreciation

 4. Not suitable for all assets: This depreciation method is not appropriate for long-lasting assets whose value does not depreciate quickly.

5. Asset cannot be completely written off: In double declining depreciation, it is very unlikely that reduce the book value of an asset to zero.

As a result, it is unlikely that an asset will have zero scrap value if an asset is depreciated using double declining depreciation.

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