Understanding DDB Depreciation

The declining balance method is one of the two accelerated depreciation

methods, and it uses a depreciation rate that is some multiple of the straight-line
method rate. The double declining balance (DDB) method is a type of declining
balance method that instead uses double the normal depreciation rate.

Depreciation rates used in the declining balance method could be 150%, 200%
(double), or 250% of the straight-line rate. When the depreciation rate for the
declining balance method is set as a multiple doubling the straight-line rate, the
declining balance method is effectively the double declining balance method.
Over the depreciation process, the double depreciation rate remains constant
and is applied to the reducing book value each depreciation period. The book
value, or depreciation base, of an asset, declines over time.

With the constant double depreciation rate and a successively lower depreciation
base, charges calculated with this method continually drop. The balance of the
book value is eventually reduced to the asset's salvage value after the last
depreciation period. However, the final depreciation charge may have to be
limited to a lesser amount to keep the salvage value as estimated.

Under the generally accepted accounting principles (GAAP) for public

companies, expenses are recorded in the same period as the revenue that is
earned as a result of those expenses.1  Thus, when a company purchases an
expensive asset that will be used for many years, it does not deduct the entire
purchase price as a business expense in the year of purchase but instead
deducts the price over several years.2

Because the double declining balance method results in larger depreciation

expenses near the beginning of an asset’s life—and smaller depreciation
expenses later on—it makes sense to use this method with assets that lose value
quickly.

 
Double declining balance depreciation allows for higher depreciation expenses in
early years and lower expenses as an asset nears the end of its life. This is
considered an accelerated depreciation method.