Double Declining Balance Method of Depreciation - YouTube

>> This is the double declining balance method for depreciating fixed assets

or property, plant and equipment.

Okay, so we're going to deal with the following information.

Cost of the equipment is $200,000.

Salvage value is $20,000.

Useful life is five years and 20,000 hours.

With this method we'll be using the years, not the activity.

And notice there are three steps when we use the double declining balance method.

First, we calculate the straight line depreciation percentage.

Which is one divided by the useful life of five years.

One divided by five, my straight line percentage, SL,

straight line percentage is 20 percent.

Step two, I double the straight line percentage.

And this gives me the double declining balance percentage.

20 percent times 2 equals 40 percent.

That is my double declining balance percentage, DDB.

And, step three, we multiply the beginning

of the year book value times the double declining balance percentage.

Since the beginning book value in Year 1 is always cost,

because we have not yet recorded any depreciation.

In this example, 200,000 divided

by the 40 percent double declining balance percentage will give us Year 1 depreciation.

Which in this case would be $80,000.

So my beginning book value times 0.4 is 80,000.

My adjusting journal entry to record depreciation is debit depreciation expense.

Credit accumulated depreciation.

So accumulated would be 80,000.

And then remember, ending book value is cost minus accumulated depreciation.

Which at the end of the year, December 31st, will be $120,000.

Okay. Now, I'm also going to put up a T-account

so we can see how accumulated depreciation accumulates.

And how it affects book value.

Now, the clock strikes midnight, December 31st of Year 1 becomes January 1st of Year 2.

And I'm just going to do this.

This means I'm going to keep multiplying these numbers by 0.4.

120,000 times 0.4 is 48,000.

48,000 plus Year 1's depreciation of 80.

Accumulated is 128,000.

And ending book value 72,000.

Year 2 depreciation expense, debit accumulated, excuse me, debit depreciation expense 48,000.

Credit accumulated 48,000.

On the balance sheet we show the equipment at its original cost of 200.

And accumulated now at 128.

So we show the net book value of 72,000.

That becomes my Year 3 beginning book value.

I'm going to multiply that times 0.4.

And that's going to give me 28,800 of depreciation expense in Year 3.

So I'm going to add 28,800.

And I'm going to get 156,800.

Okay, 156,800.

And then my ending book value will be cost of 200 minus 156.

43,200, okay.

So, again, this is the depreciation expense in Year 3.

Here's the ending book value Year 3.

That becomes beginning book value in Year 4.

I multiply 43,200 times 0.4, and I get 17,280.

So I add that 17,280, and that gives me 174,080.

174,080, and then my ending book value 25,920.

Cost of 200 minus accumulated 174,080 gives me 25,920.

Now, we got to watch out, in the last year or two,

that we don't go over the salvage value, or past the salvage value.

So 25,920, if I were to multiply that times 0.4, that would give me 10,368.

10,368, let's see.

Notice my accumulated depreciation would be 184,448.

And that would mean my ending book value is 15,552.

And then ending book value would be lower than salvage value.

We're not allowed to do that.

So I cannot record that much depreciation.

We know that ending book value has to stop when hits salvage value of 20,000.

That means accumulated depreciation cannot exceed 180,000.

Because 200 cost minus 180 is 20.

So the way that I calculate or the way that I figure out depreciation expense

in Year 5 is I look at the difference between the ending accumulated depreciation in Year 4

and what the ending accumulated depreciation has to be in Year 5.

And the difference between these two is $5,920.

So 5,920, sorry.

5,920, let me erase that, would get us to 180,000.

Okay, so with this method you have to be mindful

that you cannot depreciate below the salvage value.

Which means, even though when we multiply the beginning book value

by the declining balance percentage, we may not be able to take

that full amount of depreciation.

We have to figure out what this number is by comparing last year's ending accumulated

and what ending accumulated for this year is.

And considering that it cannot exceed 180,

the difference between these two numbers would give us the 5,920.

We could also say the difference between ending book value in Year 4 and ending book value

in Year 5, notice the difference is 5,920.

Okay, and so either way we can calculate the final year depreciation.

Okay, and that is the double declining balance method of depreciation.