Also known as the reducing balance method, a double declining balance is an accounting term that refers to how you account for the expense of an asset and is primarily all used when you want to use an accelerated depreciation method.
A very basic explanation of a double declining balance is that it is an accounting method that gives you a way to depreciate an asset twice as quickly as you would normally, primarily because you might have an asset that is likely to lose its value quite rapidly.
Here is a closer look at what you need to know in order to understand what a double declining balance is and when you might want to use this accounting method.
Depreciation – a way of accounting for a decline in value
When you buy an asset for your business you need to be able to use an accounting process that gives you a way to record how the value of that asset has declined after each year of ownership has passed.
It is standard practice to use depreciation in order to align what an asset is worth to the business, both physically and financially.
You can use depreciation as a tax-efficient way of writing down the value of an asset and it is a recognized way of accounting for an asset’s cost to the business throughout its life, before becoming obsolete and possibly replaced by another asset.
What about double declining depreciation?
Some assets will lose their value much quicker than others and that is where an accelerated method of depreciation comes into play in the form of a double declining balance.
Whether you want to write down the value of an asset more quickly for accounting or tax reasons, you may want to use a depreciation rate that is double the standard rate that is applied as a default option.
When you use a straight-line depreciation method, in comparison, you write down the value of an asset evenly over a period of time. Accelerated depreciation is a way of accounting for a greater loss in value in the first few years before leveling out.
When would you use a double declining balance?
It often makes sense to use the double depreciation method when you acquire an asset for your business that is likely to lose its value quicker than some other assets.
A prime example of this would be computer equipment, which can become obsolete quite quickly as technology evolves and you might seek to upgrade to keep pace with these changes.
Writing down the value of an asset like this using normal depreciation would probably take too long to account for what is a more rapid loss in value.
Using a double declining method allows you to use an accounting method that recognizes the rapid decline of an asset in the early years and gives you a recognized solution to write down its value in line with this sharp loss in value.
Next time you buy an asset for your business, you may want to decide how quickly it will depreciate so that you can use the right accounting method to write down its value accurately.