DOUBLE DECLINING BALANCE Method of Depreciation - YouTube

Hey there welcome back to Accounting Stuff!

I'm James and in this video I'll show you how to

calculate depreciation using the double declining balance method

Let's begin

Depreciation is the process of reducing

the book value of a tangible fixed asset due to use

wear and tear the passing of time

or obsolescence

Double declining balance depreciation

is an accelerated variable cost depreciation method

where the expense is higher in early years

Let's expand on this with an example

Pretend for a moment that

you're an architect you design beautiful

new houses for a living One day on the job your old laptop

finally kicks the bucket so you have to buy a new one

It costs you $2,500 This new laptop is what we

accountants call a tangible fixed asset it’s tangible because you can touch it

and it's fixed because you plan to use it for a long time

in this case probably five years Let's depreciate it using the

double declining balance method

Step 1

Write down what you know Your new asset

is a laptop and we're depreciating it using the double declining balance method

Your asset cost is what you initially paid for it… $2,500

With this method we can ignore residual value

useful life is five years

and we can leave depreciation rate blank for now

we'll return to that in Step 3 and we can ignore depreciable cost as well

Step 2 Build a depreciation schedule

When using the double declining balance method

the depreciation schedule is laid out in exactly the

same way as it was last week when we covered the

straight-line depreciation method

It's a table with five columns we have year

opening book value depreciation expense

accumulated depreciation and closing book value

Step 3 Calculate the depreciation expense

accumulated depreciation and book values for each period

This is where we get to fill in all of the blanks

and we'll start with year 1 this is the first accounting period

Your opening book value is the carrying amount of your laptop

at the start of the year this is the same as your asset cost

$2,500

Now let's work out your depreciation expense

This is the portion of your laptop that you write off as an expense

to your income statement during the year Remember that

double declining balance depreciation is an accelerated variable cost

depreciation method where the expense is higher in early years

This graph is quite different to the straight-line depreciation one

but the two are linked because in the

double declining balance method your depreciation expense is equal

to 2 multiplied by your straight-line depreciation rate

multiplied by your opening book value Your straight-line depreciation rate

is 1 divided by the useful life of your laptop so in this case that's 1 over 5 years which

is 20%

Your opening book value is the

carrying amount of your laptop at the start of each year

in year one it’s $2,500 the same as your asset cost

but be careful because this changes each period

2 multiplied by 20% is 40% your double declining balance depreciation rate

40% of $2,500 gives you $1,000 which is your laptop's depreciation expense

Accumulated depreciation is the sum of all depreciation expenses incurred to date

In year one it matches your depreciation expense so it's $1,000

Closing book value is the carrying amount of your laptop at the end of the year

This is the net asset amount that you hold in your balance sheet

it's your opening book value of $2,500 minus your depreciation expense of $1000

so $1,500

Your closing book value in year 1

becomes your opening book value in year 2 Your depreciation expense is your

double declining balance depreciation rate multiplied by your opening book value

at the start of the year So that's 40% multiplied by $1,500

which is $600

Accumulated depreciation is $1,600

and your closing book value is $1,500 - $600 which is $900

I outline this whole process for all of the depreciation methods

on my cheat sheet If you'd like to support this channel

then you can grab a copy on my website the link’s up here

and I'll drop one in the description as well Now this is what we're left with

if we repeat the technique for the rest of your laptop's useful life

You start off with a laptop costing $2,500 and you write off

a depreciation expense to your income statement each year

After five years you're left with a closing book value of $194

Note that the depreciation expense changes each time

Hmm… let's see this plotted on the graph this is your laptop’s book value over time

your asset cost at the beginning is $2,500 and it has a useful life of five years

the depreciation expense is variable because it changes each year

and it's accelerated because it's higher in early years

but the double declining balance method isn't the only accelerated depreciation method

In the next video I'll cover another one called sum of the year’s digits

Remember to click subscribe if you'd like to see that

I'll drop it in my depreciation playlist as soon as it's finished and if

you’d like copy of the cheat sheet

here it is

Stay safe