Under the declining balance methods, the asset’s salvage value is used as the minimum book value; the total lifetime depreciation is thus the same as under the other methods. Depreciation is an allocation of an asset’s cost over its useful life. FitBuilders estimates that the residual or salvage value at the end of the fixed asset’s life is $1,250. Since we already have an ending book value, let’s squeeze in the 2026 depreciation expense by deducting $1,250 from $1,620. Let’s assume that FitBuilders, a fictitious construction company, purchased a fixed asset worth $12,500 on Jan. 1, 2022.

The straight-line depreciation percentage is, therefore, 20%—one-fifth of the difference between the purchase price and the salvage value of the vehicle each year. Doing some market research, you find you can sell your five year old ice cream truck for about $12,000—that’s the salvage value. To create a depreciation schedule, plot out the depreciation amount each year for the entire recovery period of an asset. But before we delve further into the concept of accelerated depreciation, we’ll review some basic accounting terminology. By accelerating the depreciation and incurring a larger expense in earlier years and a smaller expense in later years, net income is deferred to later years, and taxes are pushed out. Even though year five’s total depreciation should have been $5,184, only $4,960 could be depreciated before reaching the salvage value of the asset, which is $8,000.

Double Declining Balance Method vs. Straight Line Depreciation

Recovery period, or the useful life of the asset, is the period over which you’re depreciating it, in years. Instead of multiplying by our fixed rate, we’ll link the end-of-period balance in Year 5 to our salvage value assumption. Since public companies are incentivized to increase shareholder value (and thus, their share price), it is often in their best interests to recognize double declining balance method depreciation more gradually using the straight-line method. In addition, capital expenditures (Capex) consist of not only the new purchase of equipment, but also the maintenance of the equipment. In year 5, however, the balance would shift and the accelerated approach would have only $55,520 of depreciation, while the non-accelerated approach would have a higher number.

Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business. He completed his degree in accountancy at Silliman University and is a CPA registered in the Philippines. Before joining FSB, Eric worked as a freelance content writer with various digital marketing agencies in Australia, the United States, https://www.bookstime.com/articles/royalties-accounting and the Philippines. You should use MACRS to report depreciation deductions in your tax returns. Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. As a business owner, you have many options for paying yourself, but each comes with tax implications.

What is the 150% declining balance depreciation?

For example, if the equipment in the above case is purchased on 1 October rather than 2 January, depreciation for the period between 1 October and 31 December is ($16,000 x 3/12). These points are illustrated in the following schedule, which shows yearly depreciation calculations for the equipment in this example. This rate is applied to the asset’s remaining book value at the beginning of each year. The arbitrary rates used under the tax regulations often result in assigning depreciation to more or fewer years than the service life. If the beginning book value is equal (or almost equal) with the salvage value, don’t apply the DDB rate.

Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years–that is, $30,000 minus $3,000, divided by 10. By reducing the value of that asset on the company’s books, a business is able to claim tax deductions each year for the presumed lost value of the asset over that year. Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability in the first few years after purchasing them.

Calculating the Double Declining Depreciation Method

Let’s examine the steps that need to be taken to calculate this form of accelerated depreciation. Consider a widget manufacturer that purchases a $200,000 packaging machine with an estimated salvage value of $25,000 and a useful life of five years. Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. This formula works for each year you are depreciating an asset, except for the last year of an asset’s useful life. In that year, the amount to be depreciated will be the difference between the book value of the asset at the beginning of the year and its final salvage value (this is usually just a small remainder). DDB depreciation is less advantageous when a business owner wants to spread out the tax benefits of depreciation over the useful life of a product.