This method takes most of the depreciation charges upfront, in the early years, lowering profits on the income statement sooner rather than later. The theory is that certain assets experience most of their usage, and lose most of their value, shortly after being acquired rather than evenly over a longer period of time. Lowered profits result in lesser income taxes paid in those earlier years.
Analyze the Income Statement
The double declining balance depreciation method shifts a company’s tax liability to later years when the bulk of the depreciation has been written off. The company will have less depreciation expense, resulting in a higher net income, and higher taxes paid. This method accelerates straight-line method by doubling the straight-line rate per year. Due to the accelerated depreciation expense, a company’s profits don’t represent the actual results because the depreciation has lowered its net income.
How to Calculate Double Declining Balance Depreciation
Companies can use one of two versions of the double declining balance method: the 150% version or the 200% version. The 150% method is appropriate for property that has a longer useful life. This example uses the 200% version. Assume that you’ve purchased a $100,000 asset that will be worth $10,000 at the end of its useful life. This gives you a balance subject to a depreciation of $90,000. Assume that the useful life of the asset is ten years.
