DIFFERENCE BETWEEN STRAIGHT LINE DEPRECIATION AND DOUBLE DECLINING DEPRECIATION (WITH EXAMPLE)

Straight line depreciation is a depreciation method where an asset cost is divided evenly among its useful years.

In straight-line depreciation, an asset is depreciated evenly until it reaches its scrap value.

Double declining balance is a method of depreciation where an asset is depreciated at twice the rate of straight-line depreciation.

It is a depreciation method where an asset is depreciated twice as fast as straight-line depreciation.

Differences Between Straight line depreciation and Double declining balance depreciation

1. Straight line is a constant charge method of depreciation because it provides a uniform charge throughout the useful life of an asset.

In contrast, double declining balance depreciation is an accelerated method of depreciation where a higher amount of depreciation is charged in the early years and a lower amount in the latter years of an asset.

2. Straight-line depreciation applies a fixed percentage to the depreciable value of the asset while a double declining balance applies twice the rate of straight-line depreciation to the asset's book value.

3. Straight-line depreciation will reduce the asset's book value to its scrap value at the end of its useful life.

However, with double decreasing depreciation, the asset's book value typically does not match its scrap value when it reaches the end of its useful life.

4. When plotted graphically, straight-line depreciation is a straight line.

When plotted graphically, double declining balance depreciation is not a straight line. Rather, it is a somewhat curve line.

Let's look at an example to illustrate the differences between straight-line depreciation and double declining balance depreciation.

Example

Assuming a company spent €970,000 on furniture that it planned to use for 5 years. It would be worth €70,000 after five years.

Use straight-line and double-declining depreciation to depreciate the furniture, demonstrating how it affects the organization's net profit.

Solution

Using straight-line depreciation, the depreciable amount is $970,000-70,000=900,000$

The depreciation rate for each year will be 1/5 which is 20%.

$$Dep=\frac{20}{100}×900,000=180,000$$

The annual depreciation charge is, therefore, €180,000.

Using double declining balance depreciate, the depreciation charge for the first year is:

$$Dep=\frac{2×20}{100}×970,000=388,000$$

At the beginning of the second year, the asset's book value will be $970,000-388,000=582,000$. The depreciation charge for the second year is:

$$Dep=\frac{2×20}{100}×582,000=232,800$$

The asset book value for the third year is $582,000-232,800$. or $349,200$. The depreciation charge is:

$$Dep=\frac{2×20}{100}×349,200=139,680$$

The asset book value for the fourth year is $349,200-139,680$ or $209,520$. The depreciation charge is:

$$Dep=\frac{2×20}{100}×209,520=83,808$$

For the last year, the depreciation charge is:

$$Dep=\frac{2×20}{100}×125,712=50,285$$.

If we are to compare the annual depreciation for straight-line and double declining balance, it will be like this:

YearStraight line depreciationDouble declining depreciation
Year 1€180,000€388,000
Year 2€180,000€232,800
Year 3€180,000€139,680
Year 4€180,000€83,808
Year 5€180,000€50,285

According to the aforementioned table, using straight-line depreciation rather than double declining depreciation will result in an increase in the business's net profit in the first and second years, and a reduction in the net profit in the third, fourth and fifth years.

However, if double declining depreciation is used instead of straight-line depreciation, there will be a decrease in the net profit of the business in the first and second years, and an increase in the net profit in the third, fourth and fifth years.

We know that solving depreciation using straight-line depreciation may seem tedious, and that is why we have created a calculator to help you do that.

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