How To Calculate The Declining Balance Method For Depreciation Explained - Double Declining Method

In this video we discuss what is and how to calculate the declining balance method for depreciation. We go through a detailed example step by step and cover the formula for the declining balance method

Transcript/notes (partial)
The declining balance method for depreciation is a type of accelerated depreciation that takes larger amounts of depreciation expense in the earlier years of an asset.

Let’s say that a company purchases a piece of equipment for $3000 and applies the declining balance method for depreciation. What is the depreciation schedule?

To do this, we must know 3 things, the purchase cost of the equipment, the useful life of the equipment or asset, and the residual or salvage value of the equipment. Salvage value is the amount the company expects to receive at the end of the useful life of the equipment or asset.
For our example, the useful life is 5 years, and the salvage value is $500.
The formula for depreciation expense for the declining balance method is, depreciation expense each year equals, the book value of the equipment or asset at the beginning of the year times the depreciation rate.

In order to use this formula we must calculate the depreciation rate, and the formula to calculate the depreciation rate is, depreciation rate equals, 100% divided by the years of useful life times the depreciation factor. The depreciation factor is often 1.5, 1.75, 2, or sometimes even 3, and this factor is a multiplier of the straight-line depreciation rate. A factor of 2 is most commonly used, and when it is used this is called the double declining method for depreciation.

For our example, we are going to use a factor of 2. So, plugging that in, we have, depreciation rate equals, 100% divided by 5, the useful life of the asset, times 2. And this calculates to 40%.

So, our depreciation expense formula is, depreciation expense each year equals, the book value of the equipment or asset at the beginning of the year times 40%, or .40.

Now we have what we need to calculate the yearly depreciation expense, and we can create a depreciation schedule. We are going to put 7 columns in it, end of year, original cost of asset, accumulated depreciation at beginning of year, book value at beginning of year, depreciation expense for year, accumulated depreciation at end of year, and the book value at end of year.

And one note about book value, the value in this column cannot go below the salvage value of the asset, which in this case is $500, and this also means that the accumulated depreciation must not be greater than $2500, it is important to remember this.

We start with end of year 1, and for column 2, cost of asset, this will always be the original cost of the asset, so we can put $3000 in there. The accumulated depreciation at the beginning of year 1 will be $0, and the book value at the beginning of year 1 will be the $3000. For the depreciation expense for year 1, we use our formula of depreciation expense each year equals, the book value of the equipment or asset at the beginning of the year times the depreciation rate of 40%, or .40. Plugging in, we have $3000, times .40, and this calculates to $1200, so, we put that in the expense column.

For the 6th column, accumulated depreciation at end of year, this is the total amount of depreciation accumulated at the end of each year. So, at the end of year 1, the total amount of depreciation will be the $1200 we just calculated.

Now for the last column, the book value at end of year. This is the original cost of the asset minus the accumulated depreciation at the end of the year. So, the book value at the end of year 1 will be the original cost of $3000 minus the accumulated depreciation at end of year 1, $1200. Which equals $1800, and year 1 is complete

Now for end of year 2. For column 2, again, this is the $3000 original cost of the asset. The accumulated depreciation at the beginning of year 2 is the same as the accumulated depreciation at the end of year 1, which is $1200. The book value at the beginning of year 2 is the same as the book value at the end of year 1, which is $1800. For the depreciation expense for year 2, we use our formula, and we have $1800, the book value at the beginning of year 2 times the depreciation rate of .40, which calculates to $720.

Chapters/Timestamps
0:00 What is the declining balance method for depreciation?
0:10 Example set up
0:20 3 things needed
0:40 Formula for declining balance method for depreciation
0:56 Formula for depreciation rate
1:06 What is the depreciation factor?
1:27 How to calculate the depreciation factor
1:39 How to calculate the depreciation for each year
1:56 Depreciation schedule columns
2:12 Book value cannot go below salvage value
2:29 Start of year 1
3:47 Start of year 2
4:58 Start of year 4
6:15 Changes for year 4
7:21 Year 5
7:40 Another example