What is the double declining balance amortization method (DDB)?
The declining balance to declining balance method (DDB) is one of the two methods commonly used by a company to record the expenditure of a long-lived asset. The double declining balance depreciation method is an accelerated depreciation method that represents a charge twice as large as the book value of the asset compared to straight-line depreciation.
DDB amortization formula
TheDepreciation=2×SLDP×BVor:SLDP = linear depreciation percentageBV = Book value at the start of the periodTheThe
Amortization method of the double declining balance
The Basics of DDB Depreciation
According to generally accepted accounting principles (GAAP) for public companies, expenses are recognized during the same period as the income generated by these expenses. So when a business purchases an expensive asset that will be used for many years, it does not deduct the entire purchase price as a business expense in the year of purchase, but rather deducts the price on several years.
Since the declining balance method results in higher depreciation expenses towards the beginning of the life of an asset and lower depreciation expenses thereafter, it makes sense to use this method with assets that quickly lose value.
DDB depreciation example
As a hypothetical example, suppose that a company purchased a delivery truck for $ 30,000, which was to last 10 years. After 10 years, it would be worth $ 3,000, its salvage value. Under the straight-line method, the company would deduct $ 2,700 a year for 10 years, or $ 30,000 minus $ 3,000, divided by 10.
Using the declining balance method, however, this would deduct 20% from $ 30,000 ($ 6,000) the first year, 20% from $ 24,000 ($ 4,800) the second year ($ 4,800), etc.
Double depreciation rate
The declining balance method is a type of declining balance method with a double depreciation rate. The declining balance method is one of two accelerated depreciation methods and uses a depreciation rate which is a multiple of the rate of the straight-line method.
The depreciation rates used in the declining balance method could be 150%, 200% (double) or 250% of the straight rate. When the depreciation rate for the declining balance method is defined as a multiple of twice the linear rate, the declining balance method is in fact the declining balance double method. During the depreciation process, the double depreciation rate remains constant and is applied to the decreasing book value at each depreciation period.
Decrease in book value balance
The carrying amount, or depreciation base, of an asset decreases over time. With the constant double depreciation rate and a successively lower depreciation base, the charges calculated with this method decrease continuously. The balance of the book value is finally reduced to the recovery value of the asset after the last depreciation period. However, the final amortization expense may need to be limited to a lesser amount to maintain the salvage value as estimated.